Strategic Management. PDF

STRATEGIC
MANAGEMENT
SYLLABUS
Strategic Management
Objectives: Development and reinforcement of a general management point of view-the capacity to view the
firm from an overall perspective, in the context of its environment. Development of an understanding of
fundamental concepts in strategic management: the role of the general manager, the levels and components
of strategy, competitive analysis, and organizational evolution. Development of those skills and knowledge
peculiar to general management and the general manager's job that have not been covered in previous
functional courses. Synthesis of the knowledge gained in previous courses and understand-ing what part of
that knowledge is useful to general managers.
S. No. Description
Nature of Strategic Management: Dimensions, benefits and risks, the strategic management
1. process.
Establishment of Strategic Intent: Business vision and mission, importance, characteristics
2. and Components,
evaluating mission statement, concept of goals and objectives.
The Environment Appraisal: External assessment, concept of environment, porters five force
3. analysis, industry
and competitive analysis, environmental scanning.
Organizational Appraisal – the Internal Assessment: SWOT analysis, strategy and culture,
4. value chain
analysis, organizational capability factors, Benchmarking.
Corporate Level Strategies: Concentration, integration, diversification, expansion strategies,
5. retrenchment and
combination strategies, internationalization, cooperation and restructuring.
Business Level Strategies: Industry structure, positioning of firm, generic strategies, business
6. tactics,
internationalization.
Strategy Analysis and Choice: Process for strategic choice, strategic analysis, SWOT, industry
7. analysis,
corporate portfolio analysis, contingency strategies.
Strategic Implementation: Activating strategies, nature, barrier and model for strategy
8. implementation,
resource allocation.
Structural Implementation: Types of organizational structures, organizational design and
9. change, structures
for strategies.
Behavioural Implementation: stakeholders and strategy, stakeholders management, strategic
10. leadership,
corporate culture and strategic management, personal values and ethics, social responsibility and
strategic
management.
Functional and Operational Implementation: Functional strategies, functional plans and
11. policies, operational
plans and policies, personnel plans and strategies.
Strategic Evaluation and Control: Nature of strategic evaluation and control, strategic control,
12. operational
control, techniques for strategic control, role of organizational systems in evaluation.
CONTENTS
Unit 1: Introduction to Strategic Management 1

Unit 2: Strategy Formulation and Defining Vision 16
Unit 3: Defining Mission, Goals and Objectives 32
Unit 4: External Assessment 48
Unit 5: Organisational Appraisal: The Internal Assessment 1 76
Unit 6: Organisational Appraisal: Internal Assessment 2 91
Unit 7: Corporate Level Strategies 111
Unit 8: Business Level Strategies 139
Unit 9: Strategic Analysis and Choice 157
Unit
10: Strategy Implementation 182
Unit
11: Structural Implementation 199
Unit
12: Behavioural Implementation 217
Unit
13: Functional and Operational Implementation 236
Unit
14: Strategic Evaluation and Control 251
Unit 1: Introduction to Strategic
Management
Unit 1: Introduction to Strategic Note

s
Management
CONTENTS
Objectives
Introduction
Definition of Strategic Management
Nature of Strategic Management
Dimensions of Strategic Management
Need for Strategic Management
Benefits of Strategic Management
Risks involved in Strategic Management
Strategic Management Process
Summary
Keywords
Self Assessment
Review Questions
Further Readings
Objectives
After studying this unit, you will be able to:
State the meaning, nature and importance of strategic management
Explain the dimensions and benefits of strategic management
Identify the risks involved in strategic management
Discuss the strategic management process
Introduction
Strategic Management is exciting and challenging. It makes fundamental decisions

about the future direction of a firm – its purpose, its resources and how it interacts
with the environment in which it operates. Every aspect of the organisation plays a
role in strategy – its people, its finances, its production methods, its customers and
so on.
Strategic Management can be described as the identification of the purpose of the
organisation and the plans and actions to achieve that purpose. It is that set of
managerial decisions and actions that determine the long-term performance of a
business enterprise. It involves formulating and implementing strategies that will help in
aligning the organisation and its environment to achieve organisational goals. Strategic
management does not replace the traditional management
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1
activities such as planning, organising, leading or controlling. Rather, it integrates

Notes them into a
broader context taking into account the external environment and internal
capabilities and the
organisation’s overall purpose and direction. Thus, strategic management involves
those
management processes in organisations through which future impact of change is
determined
and current decisions are taken to reach a desired future. In short, strategic
management is about
envisioning the future and realizing it.
1.1 Definition of Strategic
Management
We have so far discussed the concepts of strategic thinking, strategic decision-
making and
strategic approach which, it is hoped, will serve as an a background understand the
nature of
strategic management. However, to get an understanding of what goes on in
strategic
management, it is useful to begin with definitions of strategic management. Later in
the unit, we
introduce the elements and the process of strategic management and the
importance, benefits
and limitations of strategic management.
As already mentioned, the concepts in strategic management have been developed
by a number
of authors like Alfred Chandler, Kenneth Andrews, Igor Ansoff, William Glueck, Henry
Mintzberg, Michael E. Porter, Peter Drucker and a host of others. There are therefore
several
definitions of strategic management. Some of the important definitions are:
“Strategic management is concerned with the determination of the basic long-
1. term goals and the
objectives of an enterprise, and the adoption of courses of action and allocation
of resources necessary
for carrying out these goals”.
– Alfred Chandler, 1962
“Strategic management is a stream of decisions and actions which lead to the
2. development of an
effective strategy or strategies to help achieve corporate objectives”.
– Glueck and Jauch, 1984

“Strategic management is a process of formulating, implementing and
3. evaluating cross-functional
decisions that enable an organisation to achieve its objective”.
– Fed R David, 1997

“Strategic management is the set of decisions and actions resulting in the
4. formulation and
implementation of plans designed to achieve a company’s objectives.”
– Pearce and Robinson, 1988

“Strategic management includes understanding the strategic position of an
5. organisation, making
strategic choices for the future and turning strategy into action.”
– Johnson and Sholes, 2002

“Strategic management consists of the analysis, decisions, and actions an
6. organisation undertakes in
order to create and sustain competitive advantages.”
– Dess, Lumpkin & Taylor, 2005

We observe from the above definitions that different authors have defined strategic
management
in different ways. Note that the definition of Chandler that we have quoted above is
from the
early 1960s, the period when strategic management was being recognized as a
separate discipline.
This definition consists of three basic elements:
l. Determination of long-term goals
2. Adoption of courses of action
3. Allocation of resources to achieve those goals
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Unit 1: Introduction to Strategic Management
Though this definition is simple, it does not consist of all the elements and does not Note
capture the s
essence of strategic management.
The definitions of Fred R. David, Pearce and Robinson, Johnson and Sholes and Dell,
Lumpkin
and Taylor are some of the definitions of recent origin. Taken together, these definitions
capture
three main elements that go to the heart of strategic management. The three on-going
processes
are strategic analysis, strategic formulation and strategic implementation. These three
components parallel the processes of analysis, decisions and actions. That is, strategic
management is basically concerned with:
23 Analysis of strategic goals (vision, mission and objectives) along with the
analysis of the external and internal environment of the organisation.
23 Decisions about two basic questions:
23 What businesses should we compete in?
24 How should we compete in those businesses to implement strategies?
24 Actions to implement strategies. This requires leaders to allocate the
necessary resources and to design the organisation to bring the intended
strategies to reality. This also involves evaluation and control to ensure that
the strategies are effectively implemented.
The real strategic challenge to managers is to decide on strategies that provide
competitive advantage which can be sustained over time. This is the essence of
strategic management, and Dess, Lumpkin and Taylor have rightly captured this
element in their definition.
1.2 Nature of Strategic Management
Strategic Management can be defined as the art & science of formulating,

implementing, and evaluating, cross-functional decisions that enable an
organisation to achieve its objectives. Strategic management is different in nature
from other aspects of management. An individual manager is most often required
to deal with problems of operational nature. He generally focuses on day-to-day
problems such as the efficient production of goods, the management of a sales
force, the monitoring of financial performance or the design of some new system
that will improve the level of customer service.
!
Caution These are all very important tasks. But they are essentially concerned with
effectively managing resources already deployed, within the context of an existing
strategy. In other words, operational control is what managers are involved in most
of their time. It is vital to the effective implementation of strategy, but it is not the
same as strategic management.
Strategic management involves elements geared toward a firm's long term survival
and achievement of management goals. The components of the content of a
strategy making process include a desirable future, resource allocation,
management of the firm-environment and a competitive business ethics. However,
some conflicts may result in defining the content of strategy such as differences in
interaction patterns among associates, inadequacy of available resources and
conflicts between the firm's objectives and its environment.
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3
Notes
1.3 Dimensions of Strategic Management
The characteristics of strategic management are as follows:

23 Top management involvement: Strategic management relates to several
areas of a firm’s operations. So, it requires top management’s involvement.
Generally, only the top management has the perspective needed to
understand the broad implications of its decisions and the power to authorize
the necessary resource allocations.
24 Requirement of large amounts of resources: Strategic management
requires commitment of the firm to actions over an extended period of time.
So they require substantial resources, such as, physical assets, money,
manpower etc.
Example: Decisions to expand geographically would have significant

financial implications in terms of the need to build and support a new
customer base.
25 Affect the firm’s long-term prosperity: Once a firm has committed itself
to a particular strategy, its image and competitive advantage are tied to that
strategy; its prosperity is dependent upon such a strategy for a long time.
26 Future-oriented: Strategic management encompasses forecasts, what is
anticipated by the managers. In such decisions, emphasis is placed on the
development of projections that will enable the firm to select the most
promising strategic options. In the turbulent environment, a firm will succeed
only if it takes a proactive stance towards change.
27 Multi-functional or multi-business consequences: Strategic
management has complex implications for most areas of the firm. They
impact various strategic business units especially in areas relating to
customer-mix, competitive focus, organisational structure etc. All these areas
will be affected by allocations or reallocations of responsibilities and resources
that result from these decisions.
28 Non-self-generative decisions: While strategic management may involve
making decisions relatively infrequently, the organisation must have the
preparedness to make strategic decisions at any point of time. That is why
Ansoff calls them “non-self-generative decisions.”
1.4 Need for Strategic Management
No business firm can afford to travel in a haphazard manner. It has to travel with
the support of some route map. Strategic management provides the route map for
the firm. It makes it possible for the firm to take decisions concerning the future
with a greater awareness of their implications. It provides direction to the company;
it indicates how growth could be achieved.
The external environment influences the management practices within any organisation.
Strategy links the organisation to this external world. Changes in these external forces
create both opportunities and threats to an organisation’s position – but above all, they
create uncertainty. Strategic planning offers a systematic means of coping with
uncertainty and adapting to change. It enables managers to consider how to grasp
opportunities and avoid problems, to establish and coordinate appropriate courses of
action and to set targets for achievement.
Thirdly, strategic management helps to formulate better strategies through the use of a
more systematic, logical and rational approach. Through involvement in the process,
managers and employees become committed to supporting the organisation. The
process is a learning, helping,
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educating and supporting activity. An increasing number of firms are using strategic management
Notes for the following reasons:
0 It helps the firm to be more proactive than reactive in shaping its own future.
1 It provides the roadmap for the firm. It helps the firm utilize its resources in
the best possible manner.
2 It allows the firm to anticipate change and be prepared to manage it.
3 It helps the firm to respond to environmental changes in a better way.
4 It minimizes the chances of mistakes and unpleasant surprises.
5 It provides clear objectives and direction for employees.
Case Study
Star Struck
I ridium is named
to beam afteraround
signals the 77th
theelement to signify
world, creating the 77 satellites
a worldwide mobilethat were telephone
satellite supposed
service (MSS). However, things did not work out as planned. Motorola, Iridium's chief
sponsor, has vowed not to invest any more than the $1.6 billions it has already invested
in the venture, unless other investors do so too. Iridium was chasing a very modest goal
in terms of number of subscribers - 27,000 by end of July, from 10,000 at the end of
March.
These two events are symptoms of deeper problems within the Iridium
network, as people try to work out what went wrong. Were its estimates of
MSS market (between 32 millions and 45 millions subscribers within ten years)
unrealistic? Or, are Iridium's problems due to poor vision and poor planning?
Mobile telephony, in general, has been a growth market, with subscribers
expected to reach 600 millions within the next two years. MSS providers plan
to capture 2.5% of the market by offering handsets that operate as a land-
based cellular phone and a satellite telephone when cellular service is
unavailable. Apart from business executives, other specialized users include
truckers, civil engineers, field scientists, disaster-relief agencies, news
organisations, extractive industries, and geologists. Shipping and aviation, as
well as operations in less developed countries, which lack traditional
telephone infrastructure, are also potential markets. Yet Iridium has not been
able to sign up many subscribers. The technology is quite sound - the problem
has been poor forecasting, marketing, production glitches, and some
unexpected competitive moves.
Iridium's market size forecast and value did not materialize. This may be due
to several marketing problems. Iridium's handsets cost more than $3,000, and
call charges range from $2 to $7 a minute. Iridium's handset is large (7
inches), and weighs 1 pound, limiting its portability. Manufacturing delays at
Motorala and Kyocera left customers waiting to get their telephones. In any
case, its marketing partners, Sprint, and Telecom Italia were not prepared to
sell the telephones. Its generic. "schmoozy" and "generic life-style marketing"
(according to John Richardson, Iridium's new CEO) was not suitable for its
specialized target market.
Competitive entry also hurt Iridium's already weak network. Two new entrants
to the MSS market, Global star and ICO have been able to promise the same
service at a lower cost. At a volume of 1 billion minutes per year, for instance,
the cost of a minute using Iridium's system is $1.28, compared to 51 cents a
minute for Global star, and 35 cents for
Contd...
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5
Notes ICO. The difference arises mainly because of Iridium's numerous satellites and
their use of
more power to maintain their low earth orbit. This also shortens their life span to
5 - 7 years. ICO's satellites, on the other hand, fly about 6000 miles higher in
medium-earth
orbit and have a life span of 12 years. With Iridium being forced to charge prices
far lower
than it had planned, and two low cost operators about to enter the market,
Iridium's future
is uncertain.
Questions
1. Analyze the role of poor strategic management at Motorola in Iridium's
failure.
2. What steps do you think should have been collectively taken by Motorola,
Kyocera,
Sprint and Telecom Italia to save Iridium?
Source: Adapted from The Economist, July 17, 1999.
1.5 Benefits of Strategic Management
“We are tackling 20-year problems with five-year plans staffed with two-year
personnel funded by one–year appropriations”.
– Harlan
Cleveland
The above quotation sums up why today’s decision-makers must plan and manage
strategically. In developing as well as in industrialized countries, the increasingly
rapid nature of change as well as a greater openness in the political and economic
environments, requires a different set of perspective from that needed during more
stable times.
When a certain degree of equilibrium existed in the environment, as during the
1950s, with constant positive economic growth, low debt, manageable budgets and
relative environmental stability, managers could concentrate almost exclusively on
the internal dimensions of their organisations and assume constancy in the external
environment. Forward calculations were simple, inputs were predictable, and
planning was mostly an arithmetic exercise.
Now, systems are much more open, environment is characterized by increasingly
unstable economic growth, budgets are constantly revised, inputs are thoroughly
unpredictable, and planning in the traditional sense is no longer tenable.
Therefore, today’s enterprises need strategic management to reap the benefits of
business opportunities, overcome the threats and stay ahead in the race. The
purpose of strategic management is to exploit and create new and different
opportunities for tomorrow; while long-term planning, in contrast, tries to optimize
for tomorrow the trends of today.
Today, all top companies are involved in strategic management. They are finding
ways to respond to competitors, cope with difficult environmental changes, meet
changing customer needs and effectively use available resources. At a time when
the business environment is changing rapidly, even established firms are paying
more attention to strategy because they may face new competitors who threaten
their core business. Should a firm compete in all areas or concentrate on one area?
Should a company try to extend the brand to even more diverse areas of activity, or
would it gain more by building profits in the existing areas, and achieving more
synergies across the group? Should the company continue the current strategy as it
is now, or would it initiate a radical review of its strategy? These are just a few
examples of the strategic part of the management tasks.
6 -
Notes
Notes It is important to note that strategic planning goes far beyond the planning
process. Unlike traditional planning, strategic planning involves a long-range
planning under conditions of uncertainty and complexity Such a planning involves:
0 Strategic thinking
0 Strategic decision-making
1 Strategic approach
A structured approach to strategy planning brings several benefits (Smith, 1995; Robbins, 2000)
0 It reduces uncertainty: Planning forces managers to look ahead, anticipate
change and develop appropriate responses. It also encourages managers to
consider the risks associated with alternative responses or options.
1 It provides a link between long and short terms: Planning establishes a
means of coordination between strategic objectives and the operational
activities that support the objectives.
2 It facilitates control: By setting out the organisation’s overall strategic
objectives and ensuring that these are replicated at operational level, planning
helps departments to move in the same direction towards the same set of
goals.
3 It facilitates measurement: By setting out objectives and standards,
planning provides a basis for measuring actual performance.
Strategic management has thus both financial and non-financial benefits:
23 Financial Benefits: Research indicates that organisations that engage in
strategic management are more profitable and successful than those that do
not. Businesses that followed strategic management concepts have shown
significant improvements in sales, profitability and productivity compared to
firms without systematic planning activities.
24 Non-financial benefits: Besides financial benefits, strategic management
offers other intangible benefits to a firm. They are;
23 Enhanced awareness of external threats
24 Improved understanding of competitors’ strategies
25 Reduced resistance to change
26 Clearer understanding of performance-reward relationship
27 Enhanced problem-prevention capabilities of organisation
28 Increased interaction among managers at all divisional and functional levels
29 Increased order and discipline.
According to Gordon Greenley, strategic management offers the following benefits:
23 It allows for identification, prioritization and exploitation of opportunities.
24 It provides objective view of management problems.
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Notes 3. It provides a framework for improved coordination and control of activities.

23 It minimizes the effects of adverse conditions and changes.
24 It allows decision-making to support established objectives.
25 It allows more effective allocation of time and resources to identified
opportunities.
26 It allows fewer resources and less time to be devoted to correcting erroneous
and ad hoc decisions.
27 It creates a framework for internal communication among personnel.
28 It helps integrate the behaviour of individuals into a total effort.
29 It provides a basis for clarifying individual responsibilities.
30 It encourages forward thinking.
31 It provides a cooperative, integrated enthusiastic approach to tackling
problems and opportunities.
32 It encourages a favourable attitude towards change.
33 It gives a degree of discipline and formality to the management of a business.
1.6 Risks involved in Strategic Management
Strategic management is an intricate and complex process that takes an

organisation into unchartered territory. It does not provide a ready-to-use
prescription for success. Instead, it takes the organisation through a journey and
offers a framework for addressing questions and solving problems.
Strategic management is not, therefore, a guarantee for success; it can be
dysfunctional if conducted haphazardly. The following are its limitations:
23 It is a costly exercise in terms of the time that needs to be devoted to it by
managers. The negative effect of managers spending time away from their
normal tasks may be quite serious.
24 A negative effect may arise due to the non-fulfillment of the expectations of
the participating managers, leading to frustration and disappointment.
25 Another negative effect of strategic management may arise if those
associated with the formulation of strategy are not intimately involved in the
implementation of strategies. The participants in formulation of the policy may
shirk their responsibility for the decisions taken.
As quoted by Fred R. David, some pitfalls to watch for and avoid in strategic
planning are:
0 Using strategic planning to control over decisions and resources
1 Doing strategic planning only to satisfy accreditation or regulatory requirements
2 Moving too hastily from mission development to strategy formulation
3 Failing to communicate the strategic plan to the employees, who continue
working in the dark
4 Top managers making many intuitive decisions that conflict with the formal plan
5 Top managers not actively supporting the strategic planning process
6 Failing to use plans as a standard for measuring performance
8 -
8. Delegating strategic planning to a consultant rather than involving all managers Notes
0 Failing to involve key employees in all phases of planning

1 Failing to create a collaborative climate supportive of change
2 Viewing planning to be unnecessary or unimportant
3 Becoming so engrossed in current problems that insufficient or no planning is done
4 Being so formal in planning that flexibility and creativity are stifled.
Task Name a few companies that went down due to poor strategic management.
What went wrong with them?
1.7 Strategic Management Process
Developing an organisational strategy involves four main elements – strategic

analysis, strategic choice, strategy implementation and strategy evaluation and
control. Each of these contains further steps, corresponding to a series of decisions
and actions, that form the basis of strategic management process.
0 Strategic Analysis: The foundation of strategy is a definition of
organisational purpose. This defines the business of an organisation and what
type of organisation it wants to be. Many organisations develop broad
statements of purpose, in the form of vision and mission statements. These
form the spring – boards for the development of more specific objectives and
the choice of strategies to achieve them.
Environmental analysis – assessing both the external and internal
environments is the next step in the strategy process. Managers need to
assess the opportunities and threats of the external environment in the light of
the organisation’s strengths and weaknesses keeping in view the expectations
of the stakeholders.
This analysis allows the organisation to set more specific goals or objectives
which might specify where people are expected to focus their efforts. With a
more specific set of objectives in hand, managers can then plan how to
achieve them.
1 Strategic Choice: The analysis stage provides the basis for strategic choice. It
allows managers to consider what the organisation could do given the mission,
environment and capabilities – a choice which also reflects the values of managers
and other stakeholders. (Dobson et al. 2004). These choices are about the overall
scope and direction of the business.
Since managers usually face several strategic options, they often need to
analyze these in terms of their feasibility, suitability and acceptability before
finally deciding on their direction.
2 Strategy Implementation: Implementation depends on ensuring that the
organisation has a suitable structure, the right resources and competencies
(skills, finance, technology etc.), right leadership and culture. Strategy
implementation depends on operational factors being put into place.
3 Strategy Evaluation and Control: Organisations set up appropriate
monitoring and control systems, develop standards and targets to judge
performance.
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Table 1.1 summarizes the steps involved in each of the above elements of strategic
Notes management.
Table 1.1: Steps in Strategic Management
Process
Elements in
strategy Questions Description
process
STRATEGY FORMULATION
Strategic analysis
Defining What is our Organizational purpose is generally

organization purpose? articulated in vision and mission
al purpose What kind of statements. The first task is, therefore, to
organization do identify vision and mission of the
we want to be? organization.
Environmental analysis involves the
gathering and analysis of intelligence on
the business environment. This
encompasses the external environment
(general and competitive forces), the
internal environment (resources,
competences, performance relative to
competitors), and stakeholder
expectations.
Strategic choice
Objectives provide a more detailed
Objectives Where do we want to articulation
be? of purpose and a basis for monitoring
performance.
Alternative strategic options may be
Options analysis Are there alternative identified;
options require to be appraised in order that
routes? the
best can be selected.
Strategies are the means or courses of
Strategies How are we going to action to
get there? achieve the purpose of the organization.
STRATEGY IMPLEMENTATION
A specification of the operational activities
Actions How do we turn and
plans into reality? tasks required to enable strategies to be
implemented.
STRATEGY EVALUATION AND CONTROL
How will we know Monitoring performance and progress in
Monitoring and if meeting objectives, taking corrective
we are getting action as necessary and reviewing
control there? strategy.
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The above steps can also be depicted as a series of processes involved in strategic management. Notes
Figure 1.1: A General Framework of Strategic Management Process
Agreement on and initiation of

the strategic management
process.
The organization determines vision, F

mission, goals and objectives.
The organization analyzes e

both external and internal
environment. e
The organization establishes long-
term goals and objectives. d
The organization chooses from
alternative courses of action. b
The organization implements the

a
choices to achieve strategic fit.
The organization monitors c

the implementation
k
activity.
The seven steps in the above model of strategy process fall into three broad phases –
formulation, implementation and evaluation – though in practice the three phases
interact closely.
Good strategists know that formulation and implementation of strategy rarely
proceed according to plan, partly because the constantly changing external
environment brings new opportunities or threats, and partly because there may
also be inadequate internal competence. Since these may lead the management to
change the plan, there will be frequent interaction between the activities of
formulating and implementing strategy, and management may need to return and
reformulate the plan.
Caselet Telecom Growth and Tata Strategic
T ata Strategic
technology assessedand
and competition, the estimated
telecom environment with respect
the market potential to customers,
for different regulation,
segments in the
Indian telecom market. The group's vision and long-term strategic intent in telecom was
formulated, growth options and attractive investment opportunities
were recommended to achieve this vision, and an optimum organisation
structure covering the various telecom entities in the group was evolved. The
group was able to take critical investment decisions based on Tata Strategic's
recommendations and is now one of India's leading integrated telecom
operators.
Source: tsmg.com
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Notes
1.8 Summary
Strategic or institutional management is the conduct of drafting, implementing

and evaluating cross-functional decisions that will enable an organisation to
achieve its long-term objectives.
It is a level of managerial activity under setting goals and over tactics.
It is the process of specifying the organisation's mission, vision and objectives,
developing policies and plans, often in terms of projects and programs, which
are designed to achieve these objectives, and then allocating resources to
implement the policies and plans, projects and programs.
Strategic management provides overall direction to the enterprise and is
closely related to the field of Organisation Studies.
Although a sense of direction is important, it can also stifle creativity,
especially if it is rigidly enforced. In an uncertain and ambiguous world, fluidity
can be more important than a finely tuned strategic compass.
When a strategy becomes internalized into a corporate culture, it can lead to
group think.
It can also cause an organisation to define itself too narrowly.
Even the most talented manager would no doubt agree that "comprehensive
analysis is impossible" for complex problems.
Formulation and implementation of strategy must thus occur side-by-side
rather than sequentially, because strategies are built on assumptions which, in
the absence of perfect knowledge, will never be perfectly correct.
The essence of being "strategic" thus lies in a capacity for "intelligent trial-and
error" rather than linear adherence to finally honed and detailed strategic
plans.
Strategic management is a question of interpreting, and continuously
reinterpreting, the possibilities presented by shifting circumstances for advancing
an organisation's objectives.
1.9 Keywords
Environmental Analysis: Evaluation of the possible or probable effects of

external as well as internal forces and conditions on an organisation's survival and
growth strategies.
Financial Benefits: profits associated with strategic management
Multifunctional Consequences: having complex implications on most of the
functions of the organisation
Non-financial Benefits: intangible benefits associated with strategic management
Non-Self Generative Decisions: decisions that are taken infrequently but
promptly when needed at any point of time
Plan: A set of intended actions, through which one expects to achieve a goal.
Strategic Choice: choice of course of action given the environment, mission and
capabilities
Strategic Management: stream of decisions and actions that lead to
development of effective strategy
Strategy: A plan of action designed to achieve a particular goal.
Tactic: A conceptual action taken under a well defined strategy to achieve a
specific objective.
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1.10 Self Assessment Notes
Fill in the blanks:

Strategic management provides
1. overall ......................... to the enterprise.
Strategic management is a question of interpreting, and
2. continuously ......................... , the
possibilities presented circumstances for advancing an
by ......................... organisation's
objectives.
0 The foundation of strategy is a definition of organisational ..........................
1 Organisations set up appropriate monitoring and control systems, develop
standards and targets to judge .....................
.........................
5. and ......................... of strategy rarely proceed according to plan.
The first step in the strategic management process is to develop the
6. corporate .........................
and ...................
......
Once a firm has committed itself to a particular strategy, and ...................
7. its ......................... ......
are tied to it.
A ..................... can be defined as the overall goal of an organisation that all
8. .... business
activities and processes should contribute toward achieving.
0 Formulation and implementation of strategy must occur side-by-side rather than
.........................
1 When a strategy becomes internalized into a corporate culture, it can lead to .........................
Strategic planning goes far beyond
11. the ......................... process.
Generally, only has the perspective needed to understand the
12. the ......................... broad
implications behind the strategic plans.
The real strategic goals are realized only along with the analysis of
13. the ......................... and
......................... environment of the
organisation.
Developing an organisational strategy
14. involves ......................... main elements.
Strategic planning is exercise in terms of the time that needs to be
15. a ......................... devoted
to it by managers.
1.11 Review Questions
0 Discuss the various elements of strategic management.

1 Examine the significance of strategic management.
2 "Strategic management process is the way in which strategists determine
objectives and strategic decisions". Discuss.
3 Bring out the distinguishing features of strategic management.
4 Can the process of strategic management really be depicted in a given model
or it is a prompt and dynamic process? Give reasons.
5 Depict the model of strategic management and explain its components.
-
13
Strategic
Management
Suppose you are the Managing Director of an organisation. Your organisation is

Notes 7. running
into losses due to poor management and decision making. How will you
analyse the
situation and move your organisation out of the situation?
Have you ever challenged, shaken old work methods? What problems did you
8. encounter?
Did you overcome them? How? If no, what were the reasons for their being
insurmountable?
With reference to a day's work, what steps do you take to organise and
9. prioritize your
tasks?
Describe a specific instance, in a group situation, where you made your views
10. known
about an issue important to yourself. What was the issue, and why was it
crucial?
Outline in very broad terms how you would create a strategy for say, a public
11. interest
campaign.
Answers: Self Assessment
1. direction 2. reinterpreting, shifting
3. purpose 4. performance
5. Formulation, implementation 6. vision, mission
7. image, competitive advantage 8. vision
9. sequentially 10. group think
11. planning 12. top management
13. external, internal 14. four
15. costly
Notes
Unit 2: Strategy Formulation and Defining
Vision
CONTENTS
Objectives
Introduction
Aspects of Strategy Formulation
Business Vision
0 Defining Vision
1 Nature of Vision
2 Characteristics of Vision Statements
3 Importance of Vision
4 Advantages of Vision
5 Formulating a Vision Statement
Summary
Keywords
Self Assessment
Review Questions
Further Readings
Objectives

Discuss various aspects of strategy formulation
Explain the relevance business vision
Introduction
Strategy formulation is the process of determining appropriate courses of action for

achieving organisational objectives and thereby accomplishing organisational
purpose.
Strategy formulation is vital to the well-being of a company or organisation. It produces a
clear set of recommendations, with supporting justification, that revise as necessary the
mission and objectives of the organisation, and supply the strategies for accomplishing
them. In formulation, we are trying to modify the current objectives and strategies in
ways to make the organisation more successful. This includes trying to create
"sustainable" competitive advantages – although most competitive advantages are
eroded steadily by the efforts of competitors.
Unit 2: Strategy Formulation and Defining Vision
A good recommendation should be: effective in solving the stated problem(s), practical Note
(can be s
implemented in this situation, with the resources available), feasible within a reasonable
time
frame, cost-effective, not overly disruptive, and acceptable to key "stakeholders" in the
organisation. It is important to consider "fits" between resources plus competencies with
opportunities, and also fits between risks and expectations.
There are four primary steps in this phase:

0 Reviewing the current key objectives and strategies of the organisation, which
usually would have been identified and evaluated as part of the diagnosis
1 Identifying a rich range of strategic alternatives to address the three levels of
strategy formulation outlined below, including but not limited to dealing with
the critical issues
2 Doing a balanced evaluation of advantages and disadvantages of the alternatives
relative to their feasibility plus expected effects on the issues and
contributions to the success of the organisation
3 Deciding on the alternatives that should be implemented or recommended.
In organisations, and in the practice of strategic management, strategies must be
implemented to achieve the intended results. Here it has to be remembered that
the most wonderful strategy in the history of the world is useless if not
implemented successfully.
2.1 Aspects of Strategy Formulation

The following three aspects or levels of strategy formulation, each with a different
focus, need to be dealt with in the formulation phase of strategic management. The
three sets of recommendations must be internally consistent and fit together in a
mutually supportive manner that forms an integrated hierarchy of strategy, in the
order given.
0 Corporate Level Strategy
1 Competitive Strategy
2 Functional Strategy
Let us understand each of them one by one.
0 Corporate Level Strategy: In this aspect of strategy, we are concerned with
broad decisions about total organisation's scope and direction. Basically, we
consider what changes should be made in our growth objective and strategy
for achieving it, the lines of business we are in, and how these lines of
business fit together. It is useful to think of three components of corporate
level strategy:
0 Growth or directional strategy (what should be our growth objective,
ranging from retrenchment through stability to varying degrees of growth
- and how do we accomplish this)
1 Portfolio strategy (what should be our portfolio of lines of business, which
implicitly requires reconsidering how much concentration or
diversification we should have), and
2 Parenting strategy (how we allocate resources and manage capabilities
and activities across the portfolio – where do we put special emphasis,
and how much do we integrate our various lines of business).
-
17
Notes This comprises the overall strategy elements for the corporation as a whole,
the grand strategy, if you please. Corporate strategy involves four kinds of
initiatives:
Ȁ⸀ĀᜀĀᜀĀᜀĀᜀĀᜀĀᜀĀᜀĀᜀĀĀȀ⸀ĀᜀĀᜀĀᜀĀᜀĀᜀĀᜀĀᜀĀ0 Making the necessary
moves to establish positions in different businesses and achieve an
appropriate amount and kind of diversification. A key part of corporate
strategy is making decisions on how many, what types, and which specific
lines of business the company should be in. This may involve deciding to
increase or decrease the amount and breadth of diversification. It may
involve closing out some LOB's (lines of business), adding others, and/or
changing emphasis among LOB's.
Ȁ⸀ĀᜀĀᜀĀᜀĀᜀĀᜀĀᜀĀᜀĀᜀĀĀȀ⸀ĀᜀĀᜀĀᜀĀᜀĀᜀĀᜀĀᜀĀ1 Initiating actions to

boost the combined performance of the businesses the company has
diversified into: This may involve vigorously pursuing rapid-growth
strategies in the most promising LOB's, keeping the other core
businesses healthy, initiating turnaround efforts in weak-performing
LOB's with promise, and dropping LOB's that are no longer attractive or
don't fit into the corporation's overall plans. It also may involve supplying
financial, managerial, and other resources, or acquiring and/or merging
other companies with an existing LOB.
Ȁ⸀ĀᜀĀᜀĀᜀĀᜀĀᜀĀᜀĀᜀĀᜀĀĀȀ⸀ĀᜀĀᜀĀᜀĀᜀĀᜀĀᜀĀᜀĀ2 Pursuing ways to
capture valuable cross-business strategic fits and turn them into competitive
advantages – especially transferring and sharing related technology,
procurement leverage, operating facilities, distribution channels, and/or
customers.
Ȁ⸀ĀᜀĀᜀĀᜀĀᜀĀᜀĀᜀĀᜀĀᜀĀĀȀ⸀ĀᜀĀᜀĀᜀĀᜀĀᜀĀᜀĀᜀĀ3 Establishing
investment priorities and moving more corporate resources into the most
attractive LOBs.
0 Competitive Strategy: It is quite often called as Business Level Strategy. This
involves deciding how the company will compete within each Line of Business
(LOB) or Strategic Business Unit (SBU). In this second aspect of a company's
strategy, the focus is on how to compete successfully in each of the lines of
business the company has chosen to engage in. The central thrust is how to build
and improve the company's competitive position for each of its lines of business. A
company has competitive advantage whenever it can attract customers and
defend against competitive forces better than its rivals. Companies want to
develop competitive advantages that have some sustainability (although the
typical term "sustainable competitive advantage" is usually only true dynamically,
as a firm works to continue it). Successful competitive strategies usually involve
building uniquely strong or distinctive competencies in one or several areas crucial
to success and using them to maintain a competitive edge over rivals. Some
examples of distinctive competencies are superior technology and/or product
features, better manufacturing technology and skills, superior sales and
distribution capabilities, and better customer service and convenience.
1 Functional Strategy: These more localized and shorter-horizon strategies
deal with how each functional area and unit will carry out its functional
activities to be effective and maximize resource productivity. Functional
strategies are relatively short-term activities that each functional area within a
company will carry out to implement the broader, longer-term corporate level
and business level strategies. Each functional area has a number of strategy
choices, that interact with and must be consistent with the overall company
strategies.
Three basic characteristics distinguish functional strategies from corporate
level and business level strategies: shorter time horizon, greater specificity,
and primary involvement of operating managers.
A few examples follow of functional strategy topics for the major functional
areas of marketing, finance, production/operations, research and
development, and human resources management. Each area needs to deal
with sourcing strategy, i.e., what should be done in-house and what should be
outsourced?
Marketing strategy deals with product/service choices and features, pricing Note
strategy, s
markets to be targeted, distribution, and promotion considerations. Financial
strategies
include decisions about capital acquisition, capital allocation, dividend policy, and
investment and working capital management. The production or operations
functional
strategies address choices about how and where the products or services will be
manufactured or delivered, technology to be used, management of resources, plus
purchasing and relationships with suppliers. For firms in high-tech industries, R&D
strategy
may be so central that many of the decisions will be made at the business or even
corporate
level, for example the role of technology in the company's competitive strategy,
including
choices between being a technology leader or follower. However, there will remain
more
specific decisions that are part of R&D functional strategy, such as the relative
emphasis
between product and process R&D, how new technology will be obtained (internal
development vs. external through purchasing, acquisition, licensing, alliances, etc.),
and
degree of centralization for R&D activities. Human resources functional strategy
includes
many topics, typically recommended by the human resources department, but
many
requiring top management approval.
Example: Job categories and descriptions

Pay and benefits
Recruiting
Selection and orientation
Career development and training
Evaluation and incentive systems
Policies and discipline
Management/executive selection processes
Task Find out the competitive strategies followed by Pizza Hut.
Case Study
Formulating a Strategy: Following Apple Turnaround
The firm's most

identify important
and resources
understand, and transferable,
imperfect capabilities are
notthose
easilywhich are durable,
replicated,
firm possesses clear ownership. These are the company's 'most
and in difficult
which the to
important assets' and need to be protected; and they play a pivotal role in the
competitive strategy which the company pursues. The essence of strategy
formulation, then, is to design a strategy that makes the most effective use of
these core resources and capabilities.
Consider, for example, the remarkable turnaround of Apple, the computer company
behind the Macintosh computers, between 2000 to date. Fundamental was Steve
Job's recognition that the company's sole durable, non-transferable, irreplicable
asset was Apple image and the loyalty that accompanied that image. In virtually
every other area of competitive
Contd...
performance-production cost, quality, product and process technology, and global

Notes market
scope-Apple was greatly inferior to its other rivals, such as IBM. Apple's only
opportunity
for survival was to pursue a strategy founded upon Apple's image advantage,
while
simultaneously minimising Apple' disadvantages in other capabilities. Apple' new
marketing strategy involved extending the appeal of the Apple image of
individuality
from its traditional customer group (tech savvy, graphic designers) to more a
general,
young professional types. Protection of the Apple name by means of tougher
controls
over dealers was matched by wider exploitation of the Apple name through entry
in other
industries such as the portable music business.
Apple's share of the computer market went from 15% in 1985 to 4% in 2005 and
lost around
$700 million in only three months in 1997.
However, thanks to the iPod and to the Apple's iTunes music stores, its shares
grew 90%
between 2001 up until today, i.e. from a mere $7/share. Apple is today the
premier provider
of MP3 players.
Designing strategy around the most critically important resources and
capabilities may
imply that the firm limits its strategic scope to those activities where it possesses
a clear
competitive advantage. The principal capabilities of Apple, are in design and new
products
development; it lacked both the manufacturing capabilities to compete
effectively in the
world's computer market. Apple's turnaround from year 2000 followed it decision
to
specialise upon design and new product development.
The ability of a firm's resources and capabilities to support a sustainable
competitive
advantage is essential to the time frame of a firm's strategic planning process. If
a company's
resources and capabilities lack durability or are easily transferred or replicated,
then the
company must either adopt a strategy of short-term harvesting or it must invest
in
developing new sources of competitive advantage.
These considerations are critical for small technological start-ups where the
speed of
technological change may mean that innovations offer only temporary
competitive
advantage. The company must seek either to exploit its initial innovation before
it is
challenged by stronger, established rivals or other start-ups, or it must establish
the
technological capability for a continuing stream of innovations.
The main issue for Apple is to make sure that it takes advantage of this window of
opportunity. Because there are tougher competitors down the road and the more
money
it makes, the more companies will enter the market making harder for Apple to
sustain
this new found competitive advantage.
In industries where competitive advantages based upon differentiation and
innovation
can be imitated (such as financial services, retailing, fashion clothing, toys), firms
have a
brief window of opportunity during which to exploit their advantage before
imitators
erode it away. Under such circumstances firms must be concerned not with
sustaining the
existing advantages, but with creating the flexibility and responsiveness that
permits
them to create new advantages at a faster rate than the old advantages are
being eroded by
competition.
Question
What lessons can be learnt from Apple's Turnaround?
Source: http://www.bestcxo.com/strategic-management/formulating-a-strategy-following-apple-turnaround/
20 -
Notes
2.2 Business Vision
The first task in the process of strategic management is to formulate the
organisation’s vision and mission statements. These statements define the
organisational purpose of a firm. Together with objectives, they form a “hierarchy of
goals.”
Figure 2.1: Hierarchy of Goals
Vision
Mission
Goals
Objectives
Plans
A clear vision helps in developing a mission statement, which in turn facilitates

setting of objectives of the firm after analyzing external and internal environment.
Though vision, mission and objectives together reflect the “strategic intent” of the
firm, they have their distinctive characteristics and play important roles in strategic
management.
Vision can be defined as “a mental image of a possible and desirable future state of
the organisation” (Bennis and Nanus). It is “a vividly descriptive image of what a
company wants to become in future”. Vision represents top management’s
aspirations about the company’s direction and focus. Every organisation needs to
develop a vision of the future. A clearly articulated vision moulds organisational
identity, stimulates managers in a positive way and prepares the company for the
future.
“The critical point is that a vision articulates a view of a realistic, credible, attractive
future for the organisation, a condition that is better in some important ways than
what now exists.”
Vision, therefore, not only serves as a backdrop for the development of the purpose
and strategy of a firm, but also motivates the firm’s employees to achieve it.
According to Collins and Porras, a well-conceived vision consists of two major components:
0 Core ideology
1 Envisioned future
Core ideology is based on the enduring values of the organisation (“what we stand
for and why we exists”), which remain unaffected by environmental changes.
Envisioned future consists of a long-term goal (what we aspire to become, to
achieve, to create”) which demands significant change and progress.
0 Defining Vision
Vision has been defined in several different ways. Richard Lynch defines vision as “
a challenging and imaginative picture of the future role and objectives of an
organisation, significantly going beyond its current environment and competitive
position.” E1-Namaki defines it as “a mental perception of the kind of environment
that an organisation aspires to create within a broad time horizon and the
underlying conditions for the actualization of this perception”. Kotter defines it as “a
description of something (an organisation, corporate culture, a business , a
technology, an activity) in the future.”
-
21
Notes Box 2.1 sets out a range of definitions of organisational vision. Most refer to a future
or ideal to
which organisational efforts should be directed. The vision itself is presented as a
picture or
image that serves as a guide or goal. Depending on the definition, it is referred to
as inspiring,
motivating, emotional and analytical. For Boal and Hooijberg, effective visions have
two
components:
1. A cognitive component (which focuses on outcomes and how to achieve them)
2. An affective component (which helps to motivate people and gain their
commitment to it)
Box 2.1: Definitions of Vision
0 Johnson: Vision is "clear mental picture of a future goal created jointly

by a group for the benefit of other people, which is capable of inspiring
and motivating those whose support is necessary for its achievement".
1 Kirkpatrick et al: Vision is "an ideal that represents or reflects the
shared values to which the organisation should aspire".
2 Thornberry: Vision is "a picture or view of the future. Something not yet
real, but imagined. What the organisation could and should look like. Part
analytical and part emotional".
3 Shoemaker: Vision is "the shared understanding of what the firm should
be and how it must change".
4 Kanter et al: Vision is "a picture of a destination aspired to, an end
state to be achieved via the change. It reflects the larger goal needed to
keep in mind while concentrating on concrete daily activities".
5 Stace and Dunphy: Vision is "an ambition about the future, articulated
today, it is a process of managing the present from a stretching view of
the future".
2.2.2 Nature of Vision
A vision represents an animating dream about the future of the firm. By its nature,
it is hazy and vague. That is why Collins describes it as a “Big hairy audacious goal”
(BHAG). Yet it is a powerful motivator to action. It captures both the minds and
hearts of people. It articulates a view of a realistic, credible, attractive future for the
organisation, which is better than what now exists. Developing and implementing a
vision is one of the leader’s central roles. He should not only have a “strong sense
of vision”, but also a “plan” to implement it.
Example: 1. Henry Ford’s vision of a “car in every garage” had power. It

captured the imagination of others and aided internal efforts
to mobilize resources and make it a reality. A good vision
always needs to be a bit beyond a company’s reach, but
progress towards the vision is what unifies the efforts of
company personnel.
5888 One of the most famous examples of a vision is that of
Disneyland “To be the happiest place on earth”. Other
examples are:
5888 Hindustan Lever: Our vision is to meet the everyday
needs of people everywhere.
5889 Microsoft: Empower people through great software any
time, any place and on any device.
5890 Britannia Industries: Every third Indian must be a Britannia
consumer.
22 -
Although such vision statements cannot be accurately measured, they do provide a fundamental Notes
statement of an organisation’s values, aspirations and goals.
Some more examples of vision statements are given in Box 2.2
Box 2.2: Examples of Vision Statements
0 A Coke within arm's reach of everyone on the planet (Coca Cola)

1 Encircle Caterpillar (Komatsu)
2 Become the Premier Company in the World (Motorola)
3 Put a man on the moon by the end of the decade (John F. Kennedy, April 1961)
4 Eliminate what annoys our bankers and customers (Texas Commerce Bank)
5 The one others copy (Mobil)
2.2.3 Characteristics of Vision Statements
As may be seen from the above definitions, many of the characteristics of vision
given by these authors are common such as being clear, desirable, challenging,
feasible and easy to communicate. Nutt and Backoff have identified four generic
features of visions that are likely to enhance organisational performance:
23 Possibility means the vision should entail innovative possibilities for dramatic
organisational improvements.
24 Desirability means the extent to which it draws upon shared organisational
norms and values about the way things should be done.
25 Actionability means the ability of people to see in the vision, actions that
they can take that are relevant to them.
26 Articulation means that the vision has imagery that is powerful enough to
communicate clearly a picture of where the organisation is headed.
According to Thompson and Strickland, some important characteristics of an
effective vision statement are:
23 It must be easily communicable: Everybody should be able to understand it clearly.
24 It must be graphic: It must paint a picture of the kind of company the
management is trying to create.
25 It must be directional: It must say something about the company’s journey or destination.
26 It must be feasible: It must be something which the company can
reasonably expect to achieve in due course of time.
27 It must be focused: It must be specific enough to provide managers with
guidance in making decisions.
28 It must be appealing to the long term interests of the stakeholders.
29 It must be flexible: It must allow company’s future path to change as events
unfold and circumstances change.
23
In Table 2.1, many writers have presented their views on the key elements that
Notes constitute a good
vision.
Table 2.1: Characteristics of a Good
Vision
Jock Kotter Metais Johnson El-Namaki

Clear and Imaginable— it It is a It visualizes Coherence—It
conveys picture a future
concise of dream—it aim integrates the
Memorable what future will provides It is company
Exciting and look like emotional contributed strategy and
involvemen
inspiring Desirable—It t from a the future
appeals to long- It is variety of image of the
Challenging
term interests of excessive— sources company
Centered on It
stakeholders, for and not implicates Translatable—
excellence the need
example, attainable for It is
Both stable employees, within people with translatable
and flexible customers, current specialist into
Achievable stockholders actions or skills meaningful
company
and tangible Feasible—It resources It can be goals
embodies communica
realistic, It is t and strategies
attainable goals deviant—it -ed easily Powerful—It
Focused—It breaks It has a generates
provides convention
guidance a powerful enthusiasm
motivationa
in decision l thinking l Challenging—
It is
making and frames effect challenging
Flexible—It is of reference It serves an for all
general enough
to important organizational
enable individual need participants
initiative and Unique—It
It is aligned
alternative distinguishes
with the
responses to the company
values of
changing from others
prospective
environments supporters Feasible—It is
Communicable—
It realistic and
can be explained achievable
in five minutes Idealistic—It
communicates
desired
outcome
2.2.4 Importance of Vision
Having a strategic vision is linked to competitive advantage, enhancing

organisational performance, and achieving sustained organisational growth. Clear
vision enable firms to determine how well organisational leaders are performing and
to identify gaps between the vision and current practices. Organisations preparing
for transformational change regularly undertake “envisioning” exercises to help
guide them into the future. The visioning process itself can enhance the self-esteem
of the people who participate in it because they can see the potential fruits of their
labours.
Conversely, a “lack of vision” is associated with organisational decline and failure.
As Beaver argues “Unless companies have clear vision about how they are going to
be distinctly different and unique in adding and satisfying their customers, they are
likely to be the corporate failure statistics of tomorrow”. Lacking vision is used to
explain why companies fail to build their core competencies despite having access
to adequate resources to do so. Business strategies that lack visionary content may
fail to identify when change is needed. Lack of an adequate process for translating
shared vision into collective action is associated with the failure to produce
transformational organisational change.
24 -
Thus vision statements serve as: Notes
23 A basis for performance: A vision creates a mental picture of an

organisation’s path and direction in the minds of people in the organisation
and motivates them for high performance.
24 Reflects core values: A vision is generally built around core values of an
organisation, and channelises the group’s energies towards such values and
serves as a guide to action.
25 Way to communicate: A vision statement is an exercise in communication. A
well-communicated vision statement will bring the employees together and
galvanize them into action.
26 A desirable challenge: A vision provides a desirable challenge for both
senior and junior managers.
While providing a sense of direction, strategic vision also serves as a kind of
“emotional commitment”. Thompson and Strickland point out the significance of
“vision” which is broadly as follows:
0 It crystallizes top management’s own view about firm’s long-term direction.
1 It reduces the risk of rudderless decision-making.
2 It serves as a tool for maximizing the support of organisation members for
internal changes.
3 It serves as a “beacon” to guide managers in decision-making.
4 It helps the organisation to prepare for the future.
Vision poses a challenge and addresses the human need for something to strive for.
It can depict an image of the future that is both attractive and worthwhile.
Indeed, developing a strategic vision may be regarded as a managerial imperative
in the strategic management process. This is because strategic management
presupposes the necessity to look beyond today, to anticipate the impact of new
technology, changes in customer needs and market opportunities. Creating a well-
conceived vision illuminates an organisation’s direction and purpose, and then
using it repeatedly as a reminder of “where we are headed and why” helps keep
organisation members on the chosen path.
!
Caution Although the idea of vision is widely accepted as a useful backdrop for the
development of purpose and strategy, there is a problem. Vision has little meaning
unless it can be successfully communicated to those working in the organisation,
since these are the people who will have to realize it.
2.2.5 Advantages of Vision
Several advantages accrue to an organisation having a vision. Parikh and Neubauer

point out the following advantages:
0 Good vision fosters long-term thinking.
1 It creates a common identity and a shared sense of purpose.
2 It is inspiring and exhilarating.
3 It represents a discontinuity, a step function and a jump ahead so that the
company knows what it is to be.
25
Notes 5. It fosters risk-taking and experimentation.

0 A good vision is competitive, original and unique. It makes sense in the market
place.
1 A good vision represents integrity. It is truly genuine and can be used for the
benefit of people.
Did u know? When does a vision fail?
A vision may fail when it is:

0 Too specific (fails to contain a degree of uncertainty)
1 Too vague (fails to act as a landmark)
2 Too inadequate (only partially addresses the problem)
3 Too unrealistic (perceived as unachievable)
A.D. Jick observes that a vision is also likely to fail when leaders spend 90 percent of
their time articulating it to their staff and only 10 percent of their time in
implementing it. There are two other reasons for vision failure:
0 Adaptability of vision over time
1 Presence of competing visions
2.2.6 Formulating a Vision Statement
Generally, in most cases, vision is inherited from the founder of the organisation
who creates a vision. Otherwise, some of the senior strategists in the organisation
formulate the vision statement as a part of strategic planning exercise.
Nutt and Backoff identify three different processes for crafting a vision:
0 Leader-dominated Approach: The CEO provides the strategic vision for the
organisation. This approach is criticized because it is against the philosophy of
empowerment, which maintains that people across the organisation should be
involved in processes and decisions that affect them.
1 Pump-priming Approach: The CEO provides visionary ideas and selects
people and groups within the organisation to further develop those ideas
within the broad parameters set out by the CEO.
2 Facilitation Approach: It is a “co-creating approach” in which a wide range
of people participate in the process of developing and articulating a vision.
The CEO acts as a facilitator, orchestrating the crafting process. According to
Nutt and Backoff, it is this approach that is likely to produce better visions and
more successful organisational change and performance as more people have
contributed to its development and will therefore be more willing to act in
accordance with it.
While the above frameworks identify the extent to which there is involvement
throughout the organisation in the development of the vision, they do not address
the specifics on how to develop the actual vision itself. Some routines for producing
vision are outlined in Table 2.2.
26 -
To develop a strategy with a coherent internal logic, the strategists need to

understand where the firm and industry are headed. As the future cannot be
precisely and definitely described, the strategist has to make some assumptions
about it. This requires foresight. Foresight requires imagination of how events might
unfold and the role the firm might play in shaping that future to the firm’s
advantage. “Vision” is therefore needed to guide the strategists’ plan for bridging
the gap between current reality and a potential future.
Note
Table 2.2: Developing the Vision
s
Implementin Vision Retreat

g (Nanus, Strategic Vision and Developing the
Strategic Vision 1996) Core Capabilities Vision
(Gratton, (Pendiebur
1996) 1992:67) y
et al., 1998:63–
67)
1. Generate
1. Articulate Phase 1: Preparation. scenarios 1. Formalize the
the long-term Establish purpose and of possible futures need for
vision goals of the retreat the organization change
2. Identify Phase 2: Initial meeting. may face 2. Identify the
strategic Two-day meeting with 2. Do a competitive issues that
discussion on vision
people and audit analysis of the need to be
processes (character of industry addressed
critical to organization), vision
scope (who it includes
achieving the and 3. Analyze the core 3. Develop
vision desired vision capabilities of the multiple
characteristics), and
3. Assess vision company and its visions
alignment of context (environmental competitors 4. Choose an
the vision issues) 4. Develop a
Phase 3: Analysis and strategic appropriate
with current report vision (best)
cycle. Facilitator aligned vision
capabilities prepares to the strategic 5. Formalize the
4. Prioritize key three scenarios of the options generated vision,
actions to future that are discussed
from steps 1–3 ensuring it is
among participants over
bridge from a
clear and
current number of weeks communicable
Phase 4: Final meeting
reality to One-
vision of the day discussion and
future evaluation of vision
alternatives and their
strategic implications
Phase 5: Post-retreat
activities. Conclusions
communicated
throughout the
organization including
ways of implementing it
Task Visit the websites of a few Blue Chip companies and find out their business
vision.
27
Notes
Caselet Microsoft Broadens Vision Statement Beyond

PCs
R
esponding
"PCcentric" to what Microsoft
vision statement perceives
to one that as serious
embraces threats,
the impact the
of the company
Internet on changed its
technology.
Specifically the shift is from "a computer on every desk and in every home" to "empower
people through great software any time, any place and on any device".
The most serious threat is the decreased need for windows' software and PCs
as developers create programmes accessible via web browsers. While the
number of developers writing for Windows is currently stable, the percentage
targeting the web have increased from 21% to 38% in the past year.
Microsoft has also introduced a pop-up notes feature in their online MSN, that
is compatible with and competes with AOl:s instant messaging (IM) feature
(Wall Street Journal, July 29, 19990). AOL has blocked Microsoft's "hacking" into
their IM feature, as this technology is currently" closed". Microsoft and other
Internet service providers such as Yahoo and Prodigy are pursuing AOL to work
with them and create interoperable systems (Wall Street Joumal, July 26,
1999b). However, Microsoft continues to adapt its software to enable its
Hotmail subscribers to continue instant communication over the Internet-in
line with its new vision.
The new corporate vision also indicates Microsoft's intentions to take
advantage of new opportunities. Consumers are using their PCs and the
Internet to share photography and sample new music. The Windows operating
system will integrate digital photography and music, technology, and online
services into Windows (Wall Street Journal, July 26, 1999c.) While the company
is still under anti-trust scrutiny, they hope to position product integration as a
competitive response to changing industries and markets. Clearly, their new
vision demands such actions.
Source: Adapted from WallStreet Journal, July 26, 1999
2.3 Summary
Strategic management is the set of managerial decisions and action that

determines the way for the long-range performance of the company.
It includes environmental scanning, strategy formulation, strategy
implementation, evaluation and control.
Strategy formulation is the development of long range plans for the effective
management of environmental opportunities and threats in light of corporate
strengths and weaknesses.
It includes defining the corporate mission, specifying achievable objectives,
developing strategies and setting policy guidelines.
Corporate strategy is one, which decides what business the organisation
should be in, and how the overall group of activities should be structured and
managed.
Competitive Strategy is concerned with creating and maintaining a
competitive advantage in each and every area of business.
Strategy that is related to each functional area of business such as production,
marketing and personnel is called functional strategy.
28 -
Corporate vision is a short, succinct, and inspiring statement of what the organisation Notes
intends to become and to achieve at some point in the future, often stated in competitive
terms.
2.4 Keywords
Core Ideology: based on the enduring values of the organisation

Corporate Level Strategy: Involves broad decisions about organisation's scope and direction.
Facilitation Approach: A wide range of people participate in the process of
developing and articulating a vision.
Functional Strategy: Involves decisions about each unit of the organisation.
Leader Dominated Approach: The CEO provides the strategic vision for the organisation.
Pump-priming Approach: The CEO provides visionary ideas and selects people
and groups within the organisation to further develop those ideas.
Strategic Business Area (SBA): SBA is a distinctive segment of the environment
in which the firm wants to do business.
Sustainable Competitive Advantage: getting a substantial edge over the competitors.
Vision: The overall goal of an organisation that all business activities and
processes should contribute toward achieving.
2.5 Self Assessment
Fill in the blanks:

0 Strategy formulation is the process of determining appropriate courses of
action for achieving organisational .....................
1 The most wonderful strategy in the history of the world is useless if not .....................
successfully.
Corporate strategy
3. involves ..................... kinds of initiatives.
Strategy formulation includes defining , specifying
4. the ..................... achievable ..................... ,
developing ...............
...... and setting policy guidelines.
0 Corporate vision is a short, succinct, and inspiring statement of what the organisation
intends and
to ................. to .................
................. basic characteristics distinguish functional strategies from
6. corporate level and
business level strategies.
Competitive Strategy is concerned with creating and maintaining a competitive
7. .................
in each and every area of
business.
Lack of vision is associated with
8. organisational ................. and .................
..................... of business vision means that it should include innovative
9. possibilities for
dramatic organizational
improvement.
A business vision should ; it should be able to paint a picture of the
10. be ..................... kind of
company the management is trying to create.
-
29
Strategic
Management
Notes
0 Suppose you are the CEO of an organisation that has just launched an I-pod to
give competition to Apple and Sony. What will be the key considerations while
developing your vision statement?
1 Given the vision, as the new Director, what ideas would you want to implement
to achieve the vision?
2 Has there ever been a time on your life when your vision of the future was so
inspiring that you converted initial nay-sayers into followers later on? If yes
discuss. If no, analyse a situation when it could have happened. Why do you
think you failed?
3 Discuss a time when you established a vision for your team. What process was
used? Were others involved in setting the vision? How did the vision contribute to
the functioning of the unit?
4 "Employees have a greater role to play in formulating strategy". Comment.
5 "Small business' success solely depends upon its strategy formulation approach".
To what extent does this statement hold good?
6 Do non-profit organisations benefit from strategy formulation? Why/why not?
7 When is a good time to formulate strategy? Explain with reasons according to
your understanding.
8 Critically analyse the leader dominated approach. Is there a better approach?
9 Do you think business vision should be reviewed and upgraded after every few
years? Justify your answer by giving suitable arguments.
1. objectives 2. implemented
corporate mission, objectives,
3. four 4. strategies
5. become, achieve 6. Three
7. advantage 8. decline, failure
9. Possibility 10. Graphic
30 -
Notes
Unit 3: Defining Mission, Goals and
Objectives
CONTENTS
Objectives
Introduction
0 Defining Mission
1 Importance of Mission Statement
2 Characteristics of a Mission Statement
3 Components of a Mission Statement
4 Formulation of Mission Statements
5 Evaluating Mission Statements
6 Distinction between Vision and Mission
7 Concept of Goals and Objectives
7.0 Goals
7.1 Objectives
8 Summary
9 Keywords
10 Self Assessment
11 Review Questions
12 Further Readings
Objectives

Define mission
State the importance, characteristics and components of mission
Evaluate mission statements
Explain the concept of goals and objectives
32 -
Unit 3: Defining Mission, Goals and Objectives
Notes
Introduction
“A mission statement is an enduring statement of purpose”. A clear mission
statement is essential for effectively establishing objectives and formulating
strategies.
A mission statement is the purpose or reason for the organisation’s existence. A well-
conceived mission statement defines the fundamental, unique purpose that sets it apart
from other companies of its type and identifies the scope of its operations in terms of
products offered and markets served. It also includes the firm’s philosophy about how it
does business and treats its employees. In short, the mission describes the company’s
product, market and technological areas of emphasis in a way that reflects the values
and priorities of the strategic decision makers.
As Fred R. David observes, mission statement is also called a creed statement, a
statement of purpose, a statement of philosophy etc. It reveals what an
organisation wants to be and whom it wants to serve. It describes an organisation’s
purpose, customers, products, markets, philosophy and basic technology. In
combination, these components of a mission statement answer a key question
about the enterprise: “What is our business?”
3.1 Defining Mission
Thompson defines mission as “The essential purpose of the organisation,

concerning particularly why it is in existence, the nature of the business it is in, and
the customers it seeks to serve and satisfy”. Hunger and Wheelen simply call the
mission as the “purpose or reason for the organisation’s existence”.
A mission can be defined as a sentence describing a company's function, markets
and competitive advantages. It is a short written statement of your business goals
and philosophies. It defines what an organisation is, why it exists and its reason for
being. At a minimum, a mission statement should define who are the primary
customers of the company, identify the products and services it produces, and
describe the geographical location in which it operates.
Example:
Ranboxy Petrochemicals: To become a research based global company.
0 Reliance Industries: To become a major player in the global chemicals
business and simultaneously grow in other growth industries like
infrastructure.
1 ONGC: To stimulate, continue and accelerate efforts to develop and maximize
the contribution of the energy sector to the economy of the country.
2 Cadbury India: To attain leadership position in the confectionery market and
achieve a strong national presence in the food drinks sector.
3 Hindustan Lever: Our purpose is to meet everyday needs of people
everywhere – to anticipate the aspirations of our consumers and customers,
and to respond creatively and competitively with branded products and
services which raise the quality of life.
4 McDonald: To offer the customer fast food prepared in the same high quality
worldwide, tasty and reasonably priced, delivered in a consistent low key décor
and friendly manner.
Most of the above mission statements set the direction of the business organisation
by identifying the key markets which they plan to serve.
-
33
Notes
Case Study
Mission MindTree
MindTree chart
whichawas foundeddistinctive
somewhat in 1999 inpath.
IndiaToday,
by a group
it hasofa IT professionals
topline
rated as one of the most promising mid-sized IT services
of $269 who wanted
millions and to
is
companies. Creditable as that is, MindTree does not want to be just that.
There is an element of serendipity about what it has been doing over the last
year. In 2008, it designated one of its founders Subroto Bagchi 'Gardener', a
gimmicky signal, intended to declare that he was moving out of the day-to-day
running of the company to nurture talent which would run the company in the
future. He has now a report card ready on a year as Gardener.
During this one year, he has also spent around 45 days travelling round the
world talking to clients and prospective ones which has yielded remarkable
insights into what firms are doing in these traumatic times. Lastly, MindTree as
a whole has spent the last year going through the exercise of redefining its
mission statement and vision for the next five years. Quite fortuitously these
three processes have come together with a unifying thread, presenting a
coherent big picture.
MindTree wants to seed the future while still young, and executive chairman
Ashok Soota has declared that by 2020, it will be led by a non-founder. So a
year ago the Gardener Bagchi set out to "touch" 100 top people in the
organisation, with a goal of doing 50 in a year so as to eventually identify the
top 20 by 2015. From among them will emerge not just the leader but a team
of ten who would eventually, as group heads, deliver $200 millions of turnover
each. That will give a turnover of $2 billions. To put it in perspective, only one
VC-funded company, which has not closed or been bought over, has been able
to get to $2 billions and that is Google.
But to get there it has to periodically redefine its mission (why we exist) and
its vision - measurable goals for the next five years. Its redefined mission is
built around "successful customers, happy people, innovative solutions". Its
new vision targets a turnover of $1 billion by 2014. It wants to be among the
globally 20 most profitable IT services companies and also among the 20
globally most admired ones. Admired in terms of customer satisfaction (par for
the course), people practices (creditable), knowledge management (exciting)
and corporate governance (the Enron-Satyam effect).
The really interesting bit about MindTree in the last one year is what Bagchi
has been up to. He has been embedding himself in the 50 lives, working in a
personal private continuum, making it a rich learning process "which has
helped connect so many dots." Of the hundred who will be engaged, maybe 50
will leave, of them 25 may better themselves only marginally, and from the
remaining 25 ten will emerge who will carry the company forward.
Questions
̀⠀⤀ĀȀȀ̀⠀Ā⤀ĀᜀĀᜀĀᜀĀᜀĀᜀĀᜀĀᜀᜀȀȀ̀⠀⤀ĀᜀĀᜀĀᜀĀᜀĀᜀĀᜀĀᜀĀᜀᜀЀȀ̀⠀⤀ĀᜀĀᜀĀᜀĀᜀĀᜀ
ĀᜀĀᜀĀᜀĀ̀ ȀᜀĀЀȀ̀⠀Ā⤀ĀᜀĀᜀĀᜀĀᜀĀᜀ0 What do you analyse as the main
reason behind the success of Mindtree?
̀⠀⤀ĀȀȀ̀⠀Ā⤀ĀᜀĀᜀĀᜀĀᜀĀᜀĀᜀĀᜀᜀȀȀ̀⠀⤀ĀᜀĀᜀĀᜀĀᜀĀᜀĀᜀĀᜀĀᜀᜀЀȀ̀⠀⤀ĀᜀĀᜀĀᜀĀᜀĀᜀ
ĀᜀĀᜀĀᜀĀ̀ ȀᜀĀЀȀ̀⠀Ā⤀ĀᜀĀᜀĀᜀĀᜀĀᜀ1 Do you think that redefining the
mission statement shows the lacunae on the part of the founder
members of an organisation? Why/why not?
Source: www.businesss-standard.com
Missions have one or more of the five distinct and identifiable components: Notes
0 Customers
1 Products or services
2 Markets
3 Concern for growth
4 Philosophy
Notes It's more important to communicate the mission statement to employees

than to customers. Your mission statement doesn't have to be clever or catchy–just
accurate.
Once a mission statement has been set, every organisation needs to periodically
review and possibly revise it to make sure it accurately reflects its goals and the
business and economic climates evolve.
Task Discuss about a time when you lost track when you lost vision/mission of your
team/department/organisation. What negative repercussions did it have?
3.2 Importance of Mission Statement
The purpose of the mission statement is to communicate to all the stakeholders

inside and outside the organisation what the company stands for and where it is
headed. It is important to develop a mission statement for the following reasons:
0 It helps to ensure unanimity of purpose within the organisation.
1 It provides a basis or standard for allocating organisational resources.
2 It establishes a general tone or organisational climate.
3 It serves as a focal point for individuals to identify with the organisation’s
purpose and direction.
4 It facilitates the translation of objectives into tasks assigned to responsible
people within the organisation.
5 It specifies organisational purpose and then helps to translate this purpose into
objectives in such a way that cost, time and performance parameters can be
assessed and controlled.
Developing a comprehensive mission statement is also important because
divergent views among managers can be revealed and resolved through the
process.
According to Pearce (1982), vision and mission statements have the following value:
0 They provide managers with a unity of direction that transcends individual,
parochial and transitory needs.
1 They promote a sense of shared expectations among all levels and
generations of employees.
2 They consolidate values over time and across individuals and interest groups.
-
35
Notes 4. They project a sense of worth and intent that can be identified and assimilated by
company outsiders.
0 Finally, they affirm the company’s commitment to responsible action, in order

to preserve and protect the essential claims of insiders for sustained survival,
growth and profitability of the firm.
According to Fred R. David, a mission statement is more than a statement of
purpose. It is
0 A declaration of attitude and outlook
1 A declaration of customer orientation
2 A declaration of social policy and responsibility
3.3 Characteristics of a Mission Statement
A good mission statement should be short, clear and easy to understand. It should
therefore possess the following characteristics:
23 Not lengthy: A mission statement should be brief.
24 Clearly articulated: It should be easy to understand so that the values, purposes,
and goals of the organisation are clear to everybody in the organisation and will be
a guide to them.
25 Broad, but not too general: A mission statement should achieve a fine
balance between specificity and generality.
26 Inspiring: A mission statement should motivate readers to action. Employees
should find it worthwhile working for such an organisation.
27 It should arouse positive feelings and emotions of both employees and
outsiders about the organisation.
28 Reflect the firm’s worth: A mission statement should generate the
impression that the firm is successful, has direction and is worthy of support
and investment.
29 Relevant: A mission statement should be appropriate to the organisation in
terms of its history, culture and shared values.
30 Current: A mission statement may become obsolete after some time. As Peter
Drucker points out, “Very few mission statements have anything like a life
expectancy of thirty, let alone, fifty years. To be good enough for ten years is
probably all one can normally expect”. Changes in environmental factors and
organisational factors may necessitate modification of the mission statement.
31 Unique: An organisation’s mission statement should establish the
individuality and uniqueness of the company.
32 Enduring: A mission statement should continually guide and inspire the
pursuit of organisational goals. It may not be fully achieved, but it should be
challenging for managers and employees of the organisation.
33 Dynamic: A mission statement should be dynamic in orientation allowing
judgments about the most promising growth directions and the less promising
ones.
34 Basis for guidance: Mission statement should provide useful criteria for
selecting a basis for generating and screening strategic options.
35 Customer orientation: A good mission statement identifies the utility of a
firm’s products or services to its customers, and attracts customers to the
firm.
36 -
14. A declaration of social policy: A mission statement should contain its philosophy about
Notes social responsibility including its obligations to the stakeholders and the society at
large.
Values, beliefs and philosophy: The mission statement should lay emphasis on
the values the firm stands for; company philosophy, known as “company
creed”, generally accompanies or appears within the mission statement.
3.4 Components of a Mission Statement
Mission statements may vary in length, content, format and specificity. But most
agree that an effective mission statement must be comprehensive enough to
include all the key components. Because a mission statement is often the most
visible and public part of the strategic management process, it is important that it
includes all the following essential components:
0 Basic product or service: What are the firm’s major products or services?
1 Primary markets: Where does the firm compete?
2 Principal technology: Is the firm technologically current?
3 Customers: Who are the firm’s customers?
4 Concern for survival, growth and profitability: Is the firm committed to
growth and financial soundness?
5 Company philosophy: What are the basic beliefs, values, aspirations and
ethical priorities of the firm?
6 Company self-concept: What is the firm’s distinctive competence or major
competitive advantage?
7 Concern for public image: Is the firm responsive to social, community and
environmental concerns?
8 Concern for employees: Are employers considered a valuable asset of the firm?
9 Concern for quality: Is the firm committed to highest quality ?
Products or Services, Markets and Technology
An indispensable component of the mission statement is specification of the firm’s basic

product or service, markets and technology. These three components describe the
company’s activity.
Survival, Growth and Profitability
Every firm has to secure its survival through growth and profitability. These three
economic goals guide the strategic direction of almost every business organisation.
A firm that is unable to survive will be incapable of satisfying the aims of any of its
stakeholders. Profitability is the mainstay goal of a business organisation, and profit
over the long term is the clearest indication of a firm’s ability to satisfy the claims
and desires of all stakeholders. A firm’s growth is inextricably linked to its survival
and profitability.
Company Philosophy
The statement of a company’s philosophy (also called company creed) generally

appears within the mission statement. It specifies the basic values, beliefs and
aspirations to which the strategic decision-makers are committed in managing the
company. The company philosophy provides a distinctive and accurate picture of
the company’s managerial outlook.
-
37
Notes Company Self-concept

Both individuals and companies have a crucial need to know themselves. The ability
of a company to survive in a highly competitive environment depends on its
realistic evaluation of its strengths and weaknesses. Description of the firm’s self-
concept provides a strong impression of the firm’s self-image.
Public Image
Mission statements should reflect the public expectations of the firm since this
makes achievement of the firm’s goals more likely.
Example: “Johnson & Johnson make safe products” reflects the customer
expectations of the company in making safe products.
Sometimes, a negative public image can be corrected by emphasizing the
beneficial aspects in the mission statements.
Concern for Employees
Mission statements should also emphasize their concern for improvement of quality
of work life, equal opportunity for all, measures for employee welfare etc.
Customers
“The customer is our top priority” is a slogan that would be claimed by most of the
businesses the world over. A focus on customer satisfaction causes managers to
realize the importance of providing an excellent customer service. So, many
companies have made customer service a key component of their mission
statement.
Quality
The emphasis on quality has received added importance in many corporate
philosophies.
Example: Motorola’s mission statement contains a statement that “dedication

to quality is a way of life at our company, so much so that it goes beyond rhetorical
slogans.”
3.5 Formulation of Mission Statements

There is no standard method for formulating mission statements. Different firms follow
different approaches. As indicated in the strategic management model, a clear mission
statement is needed before alternative strategies can be formulated and implemented.
It is important to involve as many managers as possible in the process of developing a
mission statement, because through involvement, people become committed to the
mission of the organisation.
Mission statements are generally formulated as follows:
0 In many cases, the mission is inherited i.e. the founder establishes the mission
which may remain unchanged down the years or may be modified as the
conditions change.
1 In some cases, the mission statement is drawn up by the CEO and board of
directors or a committee of strategists constituted for the purpose.
38 -
3. Engaging consultants for drawing up the mission statement is also common. Notes
0 Many companies hold brainstorming sessions of senior executives to develop
a mission statement. Soliciting employee’s views is also common.
1 According to Fred R. David, an ideal approach for developing a mission
statement would be to select several articles about mission statements and
ask all managers to read these as background information. Then ask
managers to prepare a draft mission statement for the organisation. A
facilitator or a committee of top managers, merge these statements into a
single document and distribute this draft mission statement to all managers.
Then the mission statement is finalized after taking inputs from all the
managers in a meeting. Thus, the process of developing a mission statement
represents a great opportunity for strategists to obtain needed support from
all managers in the firm.
2 Decision on how best to communicate the mission to all managers, employees
and external constituencies of an organisation are needed when the document
is in its final form. Some organisations even develop a videotape to explain
the mission statement and how it was developed.
3 The practice in Indian companies appears to be a consultative-participative
route. For example, at Mahindra and Mahindra, workshops were conducted at
two levels within the organisation with corporate planning group acting as
facilitators. The State Bank of India went one step ahead by inviting labour
unions to partake in the exercise. Satyam Computers went one more step
ahead by involving their joint venture companies and overseas clients in the
process.
!
Caution Although many organisations have mission statements, their value has
sometimes been questioned. Kay (1996) asserts that visions or missions are
indicative of a 'wish - driven strategy' that fails to recognize the limits to what
might be possible, given finite organisational resources. He cites the case of
Groupe Bull, a French computer company, which for many years sought to
challenge the supremacy of IBM, particularly in the large US market. After several
attempts, Bull finally conceded that its mission was faulty. Kay's analysis was that
for 30 years Groupe Bull was: Driven not by an assessment of what it was, but by a
vision of what it would like to be. Throughout, it lacked the distinctive capabilities
that would enable it to realize that vision. Bull epitomizes wish-driven strategy,
based on aspiration, not capability (Kay, 1996).
In a study of some organisations, Leach (1996) found that mission statements and
strategic vision had become fashionable. While in some organisations, mission
statements had made a real impact in clarifying organisational values and culture,
others regarded them only as symbolic public relations documents that had little
effect as a management tool.
The dangers are not just that missions are unrealistic and fail to recognize an
organisation's capabilities (as in the case of Groupe Bull), but also that
management fails to develop a belief in the mission statement throughout the
organisation. People come to believe in and act upon the mission statement only
when they see others doing so, especially senior management and other influential
players. The ideas of the mission statement need to be cascaded through the
structure to ensure a link between mission and day-to-day actions.
-
39
Notes
Caselet Mission of two Global Companies

Mission Statement of IBM
At IBM, we strive to lead in the invention, development and manufacture of the
industry's most advanced information technologies, including computer
systems, software, storage systems and microelectronics.
We translate these advanced technologies into value for our customers
through our professional solutions, services and consulting businesses
worldwide
Mission Statement of FedEx
"FedEx is committed to our People-Service-Profit Philosophy. We will produce
outstanding financial returns by providing totally reliable, competitively
superior, global, air-ground transportation of high-priority goods and
documents that require rapid, time-certain delivery."
Source: ibm.com and fedex.com
3.6 Evaluating Mission Statements
For a mission statement to be effective, it should meet the following ten conditions:
0 The mission statement is clear and understandable to all parties involved. The
organisation can articulate and relate to it.
1 The mission statement is brief enough for most people to remember.
2 The mission statement clearly specifies the purpose of the organisation. This
includes a clear statement about:
0 What needs the organisation is attempting to fill (not what products or
services are offered)?
1 Who the organisation's target populations are?
2 How the organisation plans to go about its business; that is, what its
primary technologies are?
3 The mission statement should have a primary focus on a single strategic
thrust.
4 The mission statement should reflect the distinctive competence of the
organisation (e.g., what can it do best? What is its unique advantage?)
5 The mission statement should be broad enough to allow flexibility in
implementation, but not so broad as to permit lack of focus.
6 The mission statement should serve as a template and be the same means by
which the organisation can make decisions.
7 The mission statement must reflect the values, beliefs and philosophy of
operations of the organisation.
8 The mission statement should reflect attainable goals.
9 The mission statement should be worked so as to serve as an energy source
and rallying point for the organisation (i.e., it should reflect commitment to
the vision).
40 -
Notes
Task Find out the mission statement of any one service company. Do they really
work the way their mission says?
3.7 Distinction between Vision and Mission
We have already distinguished between vision and mission statements in the previous
section; we throw more light on this distinction in this section. While a mission statement
describes what the organisation is now; a vision statement describes what the
organisation would like to become. A vision statement defines more of a direction as to
“where are we headed” and “what do we want to become”, whereas the company’s
mission broadly indicates the “business purpose” of the organisation. The distinction
between vision and mission can be summarized as follows:
Table 3.1: Distinction between Vision and Mission
Vision Mission
Enduring statement of philosophy, a
1. A mental image of a possible and 1. creed
desirable future state of the
organization. statement.
2. A dream. 2. The purpose or reason for a firm’s
existence.
3. Broad. 3. More specific than vision
Answers the question “what we want
4. to 4. Answers the question “what is our
become?” business”.
3.8 Concept of Goals and Objectives
3.8.1 Goals
The terms “goals and objectives” are used in a variety of ways, sometimes in a conflicting sense.
The term “goal” is often used interchangeably with the term “Objective”. But some
authors prefer to differentiate the two terms.
A goal is considered to be an open-ended statement of what one wants to
accomplish with no quantification of what is to be achieved and no time criteria for
its completion. For example, a simple statement of “increased profitability” is thus a
goal, not an objective, because it does not state how much profit the firm wants to
make. Objectives are the end results of planned activity. They state what is to be
accomplished by when and should be quantified. For example, “increase profits by
10% over the last year” is an objective.
As may be seen from the above, “goals” denote what an organisation hopes to
accomplish in a future period of time. They represent a future state or outcome of
the effort put in now. “Objectives” are the ends that state specifically how the goals
shall be achieved. In this sense, objectives make the goals operational. Objectives
are concrete and specific in contrast to goals which are generalized. While goals
may be qualitative, objectives tend to be mainly quantitative, measurable and
comparable.
-
41
Notes
Notes The distinction between goals and objectives is summarized below:
Goals Objectives
1. General Specific
2
. Qualitative Quantative, measurable
3
. Broad organization–wide target Narrow targets set by operating divisions
4
. Long term results Immediate, short term results
Some writers, however, have reversed the usage, referring to objectives as the
desired long-term results and goals as the desired short-term results. And still
others use the terms interchangeably, meaning one and the same. These authors
view that, little is gained from semantic distinctions between goals and objectives.
The important thing is to recognize that the results an enterprise seeks to achieve
vary as to both scope and time-frame. To avoid confusion, it is better to use the
single term “objectives” to refer to the performance targets and results an
organisation seeks to attain. We can use the adjectives long-term (long-range) and
short-term (short-range) to identify the relevant time-frame, and try to describe
their intended scope and level in the organisation, by using expressions like broad
objectives, functional objectives, corporate objectives etc
Some of the areas in which a company might establish its goals and objectives are:
0 Profitability (net profit)
1 Efficiency (low costs, etc)
2 Growth (increase in sales etc)
3 Shareholder wealth (dividends etc)
4 Utilization of resources (return on investment)
5 Market leadership (market share etc)
Stated vs. Operational Goals
Operational goals are the real goals of an organisation. Stated goals are the official
goals of an organisation. Operational goals tell us what the organisation is trying to
do, irrespective of what the official goals say the aims are. Official goals generally
reflect the basic philosophy of the company and are expressed in abstract
terminology, for example, ‘sufficient profit’, ‘market leadership’ etc. According to
Charles Perrow, the following are the important operational goals:
0 Environmental Goals: An organisation should be responsive to the broader
concerns of the communities in which it operates, and should have goals that
satisfy people in the external environment. For example, goals like customer
satisfaction and social responsibility may be important environmental goals.
1 Output Goals: Output goals are related to the identification of customer
needs. Issues like what markets should we serve, which product lines should
be followed, etc. are examples of output goals.
2 System Goals: These goals relate to the maintenance of the organisation
itself. Goals like growth, profitability, stability etc. are examples.
3 Product Goals: These goals relate to the nature of products delivered to
customers. They define quantity, quality, variety, innovativeness of products.
42 -
Derived Goals: These goals relate to derived or secondary areas like contribution Note
5. to political s
activities, promoting social service institutions etc.
3.8.2 Objectives
Objectives are the results or outcomes an organisation wants to achieve in pursuing

its basic mission. The basic purpose of setting objectives is to convert the strategic
vision and mission into specific performance targets. Objectives function as
yardsticks for tracking an organisation’s performance and progress.
Characteristics of Objectives
Well – stated objectives should be:

Specific
Quantifiable
Measurable
Clear
Consistent
Reasonable
Challenging
Contain a deadline for achievement
Communicated, throughout the organisation
Role of Objectives
Objectives play an important role in strategic management. They are essential for
strategy formulation and implementation because:
0 They provide legitimacy
1 They state direction
2 They aid in evaluation
3 They create synergy
4 They reveal priorities
5 They focus coordination
6 They provide basis for resource allocation
7 They act as benchmarks for monitoring progress
8 They provide motivation
43
Strategic
Management
Notes Nature of Objectives
The following are the characteristics of objectives:
Hierarchy of Objectives
In a multi – divisional firm, objectives should be established for the overall company
as well as for each division.
Objectives are generally established at the corporate, divisional and functional
levels, and as such, they form a hierarchy. The zenith of the hierarchy is the mission
of the organisation. The objectives at each level contribute to the objectives at the
next higher level.
Long-range and Short-range Objectives
Organisations need to establish both long-range and short-range objectives (Long–

range means more than one year, and short–range means one year and less.)
Short-range objectives spell out the near – term results to be achieved. By doing so,
they indicate the speed and the level of performance aimed at each succeeding
period. Short – range objectives can be identical to long– range objectives if an
organisation is performing at the targeted long-term level (for example, 20% growth
- rate every year). The most important situation where short-range objectives differ
from the long-range objectives occurs when managers cannot reach the long-range
target in just one year, and are trying to elevate organisational performance. Short–
range objectives (one – year goals) are the means for achieving long range
objectives. A company that has an objective of doubling its sales within five years
can’t wait until the third or fourth year of its five-year strategic plan. Short range
objectives then serve as stepping-stones or milestones.
Multiplicity of Objectives
Organisations pursue a number of objectives. At every level in the hierarchy,

objectives are likely to be multiple.
Example: The marketing division may have the objective of sales and
distribution of products. This objective can be broken down into a group of
objectives for the product, distribution, research and promotion activities. To
describe a single, specific goal of an organisation is to say very little about it. It
turns out that there are several goals involved. This may be due to the fact that the
enterprise has to meet internal as well as external challenges effectively. Moreover,
no single objective can place the organisation on a path of prosperity and progress
in the long run.
However, an organisation should not set too many objectives. If it does, it will lose
focus. Too many objectives have a number of problems.
Examples:(a) They dilute the drive for accomplishment

23 Minor objectives get highlighted to the detriment of major
objectives
There is no agreement to the number of objectives that a manager can effectively
handle. But, if there are so many that none receives adequate attention, the
execution of objectives becomes ineffective; there is a need to be cautious. It will
be wise to identify the relative importance of each objective, in case the list is not
manageable.
44 -
Network of Objectives Notes
Objectives form an interlocking network. They are inter-related and inter-

dependent. The implementation of one may impact the implementation of the
other. If there is no consistency between company objectives, people may pursue
goals that may be good for their own function but detrimental to the company as a
whole. Therefore, objectives should not only “fit” but also reinforce each other. As
observed by Koontz et al., “it is bad enough when goals do not support and
interlock with one another. It may be catastrophic when they interfere with one
another.”
3.9 Summary
A mission can be defined as a sentence describing a company's function,

markets and competitive advantages.
Developing your mission statement is the step which moves your strategic
planning process from the present to the future.
The mission should be broad enough to allow for the diversity (new products,
new services, new markets) one requires for one's business.
The mission statement should also be specific enough to provide the focus
necessary to the success of your business.
Once a mission statement has been set, every organisation needs to
periodically review and possibly revise it to make sure it accurately reflects its
goals and the business and economic climates evolve.
3.10 Keywords
Company philosophy: It is a set of beliefs, principles, or aims, underlying a

company's practice or conduct.
Company self concept: how much does the company knows itself
Goals: It is an open ended statement of what one wants to achieve with no
quantification of outcomes or time limit.
Mission: A statement that declares what business a company is in and who its customers are.
Objectives: The results an organisation wants to achieve in pursuing its basic mission.
3.11 Self Assessment
Fill in the blanks:

The mission statement should have a primary focus on
1. a ..................... strategic thrust.
The mission statement should
2. reflect ..................... goals.
A mission can be defined as a sentence describing a
3. company's ................. , ................. and
.................
It is more important to communicate the mission statement than
4. to ................. to .................
A mission statement should be appropriate to the organisation in terms of
5. its ................. ,
................. and .................

Every firm has to secure its survival and .............
6. through ................. ....
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45
A focus on customer satisfaction causes managers to realize the importance of

Notes 7. providing
excellent .................
The provides a distinctive and accurate picture of the
8. company ................. company's
managerial outlook.
9. …………………can't be quantified, whereas ……………….can be quantified.
10. Objectives are inter-……………………and inter-……………………….
23 "Mission describes the present and vision

the future". With this statement in mind
compare mission and vision statements.
24 Are goals and objectives the same thing?
Justify your answer. Discuss the unique
characteristics of goals and objectives.
25 Suppose you are going to open a new
mobile device manufacturing company.
Prepare a mission statement for your
company. (Try and include as many
elements mentioned in the unit as
possible)
26 "It is necessary to review the mission
statement periodically". Justify the
statement
27 How can a mission statement set the tone
of the organisation?
28 Analyse the characteristics of a good
mission statement.
29 "Like an individual should know
him/herself inside out, an organisation
should also know itself". Substantiate
30 "Goals are general in nature while objectives
are specific". Explain using suitable
examples.
31 Explain the concept of stated and

operational goals with the help of
appropriate examples.
32 What do you mean by multiplicity of

objectives? Explain using apt examples.
1. single 2. attainable
function, markets, competitive employees,
3. advantages 4. customers
5. history, culture, shared values 6. growth, profitability
7. customer service 8. philosophy
9. Goals, Objectives 10. Related, dependent

46 -
47
Notes
Unit 4: External
Assessment
CONTENTS
Objectives
Introduction
23 Concept of Environment
24 Porter’s Five Force Analysis
23 The Five Forces
24 Forces that Shape Competition
25 Industry Analysis
23 Framework for Industry Analysis
24 Industry Analysis
23 Competitive Analysis
24 Environmental Scanning
23 Features of Environmental Analysis
24 Techniques of Environmental Scanning
25 Summary
26 Keywords
27 Self Assessment
28 Review Questions
29 Further Readings
Objectives

Realise the concept of environment
Discuss porter's five forces theory
Explain the concept of industry analysis
Discuss environment scanning
48 -
Unit 4: External Assessment
Notes
Introduction
At a time of fast growth, rapid changes and cut throat comatetion as exists in about
all industries, it is a challenge for the companies to establish a strategic agenda for
dealing with these contending currents and to grow despite them.
A company must understand how the above currents work in its industry and how
they affect the company in its particular situation. For this a very useful tool is used
by the analysts. The name of this tool is external analysis.
External assessment is a step where a firm identifies opportunities that could
benefit it and threats that it should avoid. It includes monitoring, evaluating, and
disseminating of information from the external and internal environments to key
people within the corporation.
4.1 Concept of Environment
Environment literally means the surroundings, external objects, influences or

circumstances under which someone or something exists. The environment of any
organisation is “the aggregate of all conditions, events and influences that surround
and affect it.” Davis, K, The Challenge of Business, (New York: McGraw Hill, 1975),
p. 43.
Environment refers to all external forces which have a bearing on the functioning of
business. Jauch and Gluecke has defined environment as “The environment includes
factors outside the firm which can lead to opportunities or a threat to the firm. Although
there are many factors the most important of the sectors are socio-economic,
technological, supplier, competitor and govt.”
The recent changes in tariff rates have changed the toy industry of India with the
market now being dominated by Chinese products. A slight change in the Reserve
Bank of India’s monetary policy can increase or decrease interest rates in the
market. A slight shift in the government’s fiscal policy can shift the whole demand
curve towards the right or the left.
Example: Hindustan Lever Limited (HLL) took advantage of the new takeover
and merger codes and acquired brands like Kissan from the UB group, TOMCO (Tata
Oil Mills Company) and Lakme from Tata and Modern Foods from the government,
besides many other small takeovers and mergers.
The new moguls of the Indian business are those who predicted the changes in the
environment and reacted accordingly. Azim Premji of Wipro, Narayana Murthy of
Infosys, Subhash Goyal of ZEE, the Ambanis of Reliance, L.N. Mittal of Mittal Steel,
Sunil Mittal of Bharti Telecom are some of them.
Even a small businessman who plans to open a small shop as a general merchant
in his town needs to study the environment before deciding where he wants to
open his shop, the products he intend to sell and what brands he wants to stock.
The relation between a business and an environment is not a one way affair. The
business also equally influences the external environment and can bring about
changes in it. Powerful business lobbies for instance, actively work towards
changing government policies.
The business environment is not all about the economic environment but also about
the social and political environment. Politically, after the Congress government
came to power at the center with the support of the CPI in May 2004, the whole
process of disinvestments took a U-turn. Similarly, a new sociological order in India
today has created a market for fast foods, packaged foods, multiplexes, designer
names, Valentine day gifts and presents, and gymnasiums and clubs etc.
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49
Notes So it is quite obvious that success in a business depends upon better understanding
of the
environment. A successful organisation doesn’t look at the environment on an ad
hoc basis but
develops a system to study the environment on a continuous basis to try and
protect the
organisation from every possible threat and to take the advantage of every
opportunity. Some
times better and timely understanding of the environment can even turn a threat
into an
opportunity.
Importance of Business Environment
← Environment is Complex: The environment consists of a number of factors,

events, conditions and influences arising from different sources. All these
interact with each other to create new sets of influences.
← It is Dynamic: The environment by its very nature is a constantly changing
one. The varied influences operating upon it impart dynamism to it and cause
it to continually change its shape and character.
← Environment is multi -faceted: The same environmental trend can have
different effects on different industries. For instance, GATS is an opportunity
for some companies but a threat for others.
← It has a far-reaching impact: The environment has a far-reaching impact on
organisations in that the growth and profitability of an organisation depends
critically on the environment in which it exists.
← Its impact on different firms with in the same industry differs: A
change in environment may have different bearings on various firms operating
in the same industry. In the pharmaceutical industry in India, for instance, the
impact of the new IPR (Intellectual Property Rights) law will different for
research-based pharmacy companies such as Ranbaxy and Dr. Reddy’s Lab
and will be different for smaller pharmacy companies.
← It may be an opportunity as well as a threat to expansion:
Developments in the general environment often provide opportunities for
expansion in terms of both products and markets.
Example: Liberalization in 1991 opened lot of opportunities for companies

and HLL took the advantage to acquire companies like Lakme, TOMCO, KISSAN
etc. Changes in environment often also pose a serious threat to the entire
industry. Like Liberalization does pose a threat of new entrants to Indian firms
in the form of Multi National Corporation (MNCs).
← Changes in the environment can change the competitive scenario:
General environmental changes may alter the boundaries of an industry and
change the nature of its competition. This has been the case with deregulation
in the telecom sector in India. Since deregulation, every second year new
competitors emerge, old foes become friends and M&As follow every new
regulation.
← Sometimes developments are difficult to predict with any degree of
accuracy:
Macroeconomic developments such as interest rate fluctuations, the rate of
inflation, and exchange rate variations are extremely difficult to predict on a
medium or a long term basis. On the other hand, some trends such as
demographic and income levels can be easy to forecast.
50 -
Notes
4.2 Porter’s Five Force Analysis
In 1979, the Harvard Business Review published the article “How Competitive
Forces Shape Strategy” by the Harvard Professor Michael Porter. It started a
revolution in the strategy field. In subsequent decades, “Porter’s five forces” have
shaped a generation of academic research and business practice. This unit explores
how competitive analysis can be done using Porter’s five forces model.
← The Five Forces
In essence, the job of the strategist is to understand and cope with competition.
However, managers define competition too narrowly, as if it occurs only among
today’s direct competitors. Yet competition for profits goes beyond established
industry rivals. It includes four other competitive forces as well: customers,
suppliers, potential entrants and substitutes.
Figure 4.1: Porter’s Five Forces Model
Potential
entrants
Threat of
new entrants
Bargaining power
Industry
of suppliers Bargaining power competitors
of buyers
Suppliers Buyers
Rivalry among
existing firms
Threat of
substitute products
or services
Substitutes
The Five Forces model developed by Michnal E. Porter has been the most commonly
used analytical tool for examining competitive environment. According to this
model, the intensity of competition in an industry depends on five basic forces.
These five forces are:
← Threat of new entrants
← Intensity of rivalry among industry competitors
← Bargaining power of buyers
← Bargaining power of suppliers
← Threat of substitute products and services.
Each of these forces affects a firm’s ability to compete in a given market. Together,
they determine the profit potential for a particular industry. To understand industry
competition and profitability, one must analyze the industry’s underlying structure
in terms of the five forces, as shown in the Figure 4.1.
-
51
Porter argues that the stronger each of these forces are, the more limited is the ability
Notes of established
companies to raise prices and earn greater profits.
With Porter’s framework, a strong competitive force can be regarded as a threat
because it
depresses profits. A weak competitive force can be viewed as an opportunity
because it allows
a company to earn greater profits. The strength of the five forces may change with
time as
industry conditions change. For example, in industries such as airlines, textiles and
hotels,
where these forces are intense, almost no company earns attractive returns on
investment. In
pharmaceuticals and toiletries, where these forces are benign, many companies
earn attractive
profits.
Notes Understanding the competitive forces, and their underlying causes, reveals
the roots of an industry’s current profitability, while providing a framework for
anticipating and influencing competition and profitability over time. Understanding
industry structure is also essential to effective strategic positioning. Defending
against the competitive forces and shaping them in a company’s favour are crucial
to strategy.
← Forces that Shape Competition
The configuration of the five forces differ from industry to industry. For example in
the market for commercial aircraft, fierce rivalry among existing competitors (i.e.
Airbus and Boeing) and the bargaining power of buyers of aircrafts are strong, while
the threat of entry, the threat of substitutes, and the power of suppliers are more
benign. Thus, the strongest competitive force or forces determine the profitability of
an industry and becomes the most important to strategy formulation.
← The Threat of New Entrants: The first of Porter’s Five Forces model is the
threat of new entrants. New entrants bring new capacity and often substantial
resources to an industry with a desire to gain market share. Established
companies already operating in an industry often attempt to discourage new
entrants from entering the industry to protect their share of the market and
profits. Particularly when big new entrants are diversifying from other markets
into the industry, they can leverage existing capabilities and cash flows to
shake up competition. Pepsi did this when it entered the bottled water
industry, Microsoft did when it began to offer internet browsers, and Apple did
when it entered the music distribution business.
The threat of new entrants, therefore, puts a cap on the profit potential of an
industry. When the threat is high, existing companies hold down their prices or
boost investment to deter new competitors. And the threat of entry in an
industry depends on the height of entry barriers (i.e. factors that make it
costly for new entrants to enter industry) that are present and on the
retaliation from the entrenched competitors. If entry barriers are low and
newcomers expect little retaliation, the threat of entry is high and industry
profits will be moderate. It is the threat of entry, not whether entry actually
occurs, that holds down profitability.
← Barriers to entry: Entry barriers depend on the advantages that existing
companies have relative to new entrants. There are seven major sources:
← Economies of scale: These are relative cost advantages associated with
large volumes of production, that lower a company’s cost structure. The
cost of product per unit declines as the volume of production increases.
This discourages new entrants to enter on a large scale. If the new
entrant decides to enter on a large-scale to obtain economies of scale, it
has to bear high risks associated with a large investment.
52 -
A further risk is that the increased supply of products will depress prices and Note
results s
in vigorous retaliation by established companies. For these reasons, the threat
of
new entrants is reduced when established companies have economies of
scale.
Example: In microprocessors, existing companies such as Intel are

protected by
economies of scale in research, chip fabrication and consumer marketing.
(b) Product differentiation: Brand loyalty is buyer’s preference for the
differentiated
products of any established company. Strong brand loyalty makes it difficult
for
new entrants to take market share away from established companies.
It reduces threat of entry because the task of breaking down well-established
customer
preferences is too costly for them.
← Capital requirements: The need to invest large financial resources in
order to compete can deter new entrants. Capital may be necessary not
only for fixed assets, but also to extend customer credit, build inventories
and fund start-up losses. The barrier is particularly great if the capital is
required for unrecoverable expenditure, such as up-front advertising or
research and development. While major corporations have the financial
resources to invade almost any industry, the capital requirements in
certain fields limit the pool of likely entrants.
It is important not to overstate the degree to which capital requirements
alone deter entry; if industry returns are attractive and are expected to
remain so, and if capital markets are efficient, investors will provide new
entrants with the funds they need. For example, in airlines industry,
financing is available to purchase expensive aircrafts because of their
resale value, and that is why there have been a number of new airlines in
almost every region.
← Switching costs: Switching costs are the one-time costs that a customer
has to bear to switch from one product to another. When switching costs
are high, customers can be locked up in the existing product, even if new
entrants offer a better product. Thus, the higher the switching costs are,
the higher is the barrier to entry. Enterprise Resource Planning (ERP)
software is an example of a product with very high switching costs. Once
a company has installed SAP’s ERP system, the cost of moving to a new
vendor are astronomical.
← Access to distribution channels: The new entrant’s need to secure
distribution channel for the product can create a barrier to entry. The
established companies have already tied up with distribution channels.
For example, a new food item may have to displace others from the
supermarket shelf via price breaks, promotions, intense selling efforts or
some other means. The more limited the wholesale or retail channels
are, tougher will be the entry into an industry. Sometimes, if the barrier is
so high, a new entrant must create its own distribution channels as
Timex did in the watch industry in the 1950s.
← Cost disadvantages independent of size: Some existing companies may
have advantages other than size or economies of scale. These are
derived from:
← Proprietary technology
← Preferential access to raw material sources
← Government subsidies
← Favorable geographical locations
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53
Notes (v) Established brand identities

← Cumulative experience
New entrants may not have these advantages.
← Government policy: Historically, government regulations have
constituted a major entry barrier into many industries. The government
can limit or even foreclose entry into industries, with such controls as
license requirements and limits on access to raw materials. The
liberalization policy of the Indian government relating to deregulation,
delicensing and decontrol of prices opened up the economy to many new
entrepreneurs.
!
Caution Even if entry barriers are very high, new firms may still enter an industry if
they perceive that the benefits outweigh the substantial costs of entry. Such a
situation creates excess capacity in the industry and sparks off intense price
competition that might depress the returns for all players – new entrants as well as
established companies.
So, the strategist must be mindful of the creative ways newcomers might find
to circumvent apparent barriers.
← Expected Retaliation: How new entrants believe that the existing
companies may react will also influence their decision to enter or stay out of
an industry. If reaction is vigorous and protracted enough, the profit potential
in the industry can fall below the cost of capital for all participants. Existing
companies often use public statements to send massages to new entrants
about their commitment to defending market share.
New entrants are likely to fear expected retaliation if:
← Existing companies have previously responded vigorously to new
entrants
← Existing companies possess substantial resources to fight back
← Existing companies seem likely to cut prices to protect their market share
← Industry growth is slow, so newcomers can gain volume only by taking
the market share from existing companies.
An analysis of entry barriers and expected retaliation is obviously crucial for
any company contemplating entry into a new industry. The challenge is to find
ways to surmount the entry barriers without nullifying the profitability of the
industry.
← Intensity of Rivalry among Competitors: The second of Porter’s Five-
Forces model is the intensity of rivalry among established companies within an
industry. Rivalry means the competitive struggle between companies in an
industry to gain market share from each other. Firms use tactics like price
discounting, advertising campaigns, new product introductions and increased
customer service or warranties. Intense rivalry lowers prices and raises costs.
It squeezes profits out of an industry. Thus, intense rivalry among established
companies constitutes a strong threat to profitability. Alternatively, if rivalry is
less intense, companies may have the opportunity to raise prices or reduce
spending on advertising etc. which leads to higher level of industry profits.
The intensity of rivalry is greatest under the following conditions:
← Numerous competitors or equally powerful competitors: When there are many
competitors in an industry or if the competitors are roughly of equal size and
power, the intensity of rivalry will be more. Any move by one firm is matched
by an equal countermove. In such situations rivals find it hard to avoid
poaching business.
54 -
(b) Slow industry growth: Slow industry growth turns competition into fight because theNotes
only path to growth is to take sales away from a competitor.
← High fixed but low marginal costs: This creates intense pressure for
competitors to cut prices below their average costs even close to their
marginal costs, to steal customers.
Example: Many paper and aluminium businesses suffer from this

problem, especially if demand is not growing.
← Lack of differentiation or switching costs: If products or services of rivals
are nearly identical and there are few switching costs, this encourages
competitors to cut prices to win new customers. Years of airline price
wars reflect these circumstances in that industry.
← Capacity augmentation in large increments: If the only way a
manufacturer can increase capacity is in a large increment, such as
building a new plant, it will run that new plant at full capacity to keep its
unit costs low. Such capacity additions can be very disruptive to the
supply/demand balance and cause the selling prices to fall throughout
the industry.
← High exit barriers: Exit barriers keep a company from leaving the
industry. Exit barriers can be economic, strategic or emotional factors
that keep firms competing even though they may be earning low or
negative returns on their investments. If exit barriers are high,
companies become locked up in a non-profitable industry where overall
demand is static or declining. Excess capacity remains in use, and the
profitability of healthy competitors suffers as the sick ones hang on.
Did u know? What are the Common Exit Barriers?
Common exit barriers are:

← Investment in specialized assets like plant and machinery are of little or
no value, and cannot be put to alternative use. So, they have to be
continued.
← High costs of exit such as retrenchment benefits, etc. that have to be
paid to the redundant workers when a company ceases to operate.
← Emotional attachment to an industry keep owners or employees
unwilling to exit from an industry for sentimental reasons.
← Economic dependence on the industry when the firm depends on a
single industry for revenue and profit.
← Government and social pressures discourage exit of industries out of
concern for job loss.
← Strategic interrelationships between business units and others prevent
exit because of shared facilities, image and so on.
← Bargaining power of buyers: The third of Porter’s five competitive forces is the
bargaining power of buyers. Bargaining power of buyers refers to the ability of
buyers to bargain down prices charged by firms in the industry or driving up the
costs of the firm by demanding better product quality and service. By forcing lower
prices and raising costs, powerful buyers can squeeze profits out of an industry.
Thus, powerful buyers should be viewed as a threat. Alternatively, if buyers are in a
weak bargaining position, the firm can raise prices, cut costs on quality and
services and increase their profit levels. Buyers are
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55
Notes powerful if they have more negotiation leverage than the firms in the industry,
using
their clout primarily to pressure price reductions. According to Porter, buyers
are most
powerful under the following conditions:
(a) There are few buyers: If there are few buyers or each one does bulk
purchases, then
they have more bargaining power. Large buyers are particularly powerful
in
industries like telecommunication equipment, off-shore drilling, and bulk
chemicals.
High fixed costs and low marginal costs increase the pressure on rivals to
keep
capacity filling through discounts.
(b) The products are standard or undifferentiated: If the products purchased
from the firm
are standard or undifferentiated, the buyers can easily find alternative
sources of
supplies. Then buyers can play one company against the other, as in
commodity
grain markets.
(c) The buyer faces low switching costs: Switching costs lock the buyer to a
particular firm.
If switching costs are low, buyers can easily switch from one firm’s
product to
another.
(d) The buyer earns low profits: If the buyer is under pressure to trim its
purchasing costs,
the buyer is price sensitive and bargains more.
(e) The quality of buyer’s products: If the quality of buyer’s product is little
affected by
industry’s products, buyers are more price sensitive.
Most of the above sources of buyer power can be attributed to consumers as a
group as well as to industrial and commercial buyers. The buying power of retailers
is determined by the same factors, with one important addition. Retailers can gain
significant bargaining power over manufacturers when they can influence
consumers. Purchasing decisions as they do in audio components, jewellery,
appliances, sporting goods etc., are examples.
← Bargaining power of suppliers: The fourth of Porter’s Five Forces model is
the bargaining power of suppliers. Suppliers are companies that supply raw
materials, components, equipment, machinery and associated products.
Powerful suppliers make more profits by charging higher prices, limiting quality
or services or shifting the costs to industry participants. Powerful suppliers
squeeze profits out of an industry and thus, they are a threat. For example,
Microsoft has contributed to the erosion of profitability among PC makers by
raising prices on operating systems. PC makers, competing fiercely for
customers, have limited freedom to raise their prices accordingly.
A supplier’s bargaining power will be high under the following conditions:
← Few suppliers: When the supplier group is dominated by few companies
and is more concentrated than the firms to whom it sells, an industry is
called concentrated. The suppliers can then dictate prices, quality and
terms.
← Product is differentiated: When suppliers offer products that are unique or
differentiated or built-up switching costs, it cuts off the firm’s options to play
one supplier against the other. For example, pharmaceutical companies that
offer patented drugs with distinctive medical benefits have more power over
hospitals, drug buyers etc.
← Dependence of supplier group on the firm: When suppliers sell to several
firms and the firm does not represent a significant fraction of its sales,
suppliers are prone to exert power. In other words, the supplier group does
not depend heavily on the industry for revenues. Suppliers serving many
industries will not hesitate to extract maximum
56 -
profits from each one. If a particular industry accounts for a large portion of a Notes
supplier group’s volume or profit, however, suppliers will want to protect the
industry through reasonable pricing.
← Importance of the product of the firm: When the product is an important
input to the firm’s business or when such inputs are important to the
success of a firm’s manufacturing process or product quality, the
bargaining power of suppliers is high.
← Threat of forward integration: When the supplier poses a credible threat
of integrating forward, this provides a check against the firm’s ability to
improve the terms by which it purchases.
← Lack of substitutes: The power of even large, powerful suppliers can be
checked if they compete with substitutes. But, if they are not obliged to
compete with substitutes as they are not readily available, the suppliers
can exert power.
← Threat of substitute products: The fifth of Porter’s Five Forces model is the
threat of substitute products. A substitute performs the same or a similar
function as an industry’s product. Video conferences are a substitute for travel.
Plastic is a substitute for aluminum. E-mail is a substitute for a mail. All firms
within an industry compete with industries producing substitute products. For
example, companies in the coffee industry compete indirectly with those in the
tea and soft drink industries because all these serve the same need of the
customer for refreshment.
The existence of close substitutes is a strong competitive threat because this limits
the price that companies in one industry can charge for their product. If the price
of coffee rises too much relative to that of tea or soft drink, coffee drinkers may
switch to those substitutes. Thus, according to Porter, “substitutes limit the
potential returns of an industry by placing a ceiling on the prices firms in the
industry can profitably charge”. For example, the price of tea puts a ceiling on the
price of coffee. To the extent that switching costs are low, substitutes may have a
strong effect on the profitability of an industry.
The more attractive is the price/performance ratio of substitute products, the
more likely they affect an industry’s profits. In other words, when the threat of
substitutes is high, industry profitability suffers. If an industry does not ward
off the substitutes through product performance, marketing, price or other
means, it will suffer in terms of profitability and growth potential in the
following circumstances:
← It offers an attractive price and performance: The better the relative value of
the substitute, the worse is the profit potential of the industry. For example,
long distance telephone service providers suffered with the advent of
Internet-based phone services.
← The buyer’s switching costs to the substitutes is low: For example,
switching from a proprietary, branded drug to a generic drug usually
involves minimum switching costs.
Strategists should be particularly alert to changes in other industries that may
make attractive substitutes. For example, improvements in plastic materials
prompted the automobile manufactures to substitute plastic for steel in many
automobile components.
Task Compare FMCG and Automobile sectors based on Porter's five forces model.
-
57
Contd...
Notes
Case Study
IKEA: Earning through Five Forces
Nationalwith
Competitive Advantage
its headquarters of IKEA IKEA
in Denmark, is a Group, a Swedish
multinational company
operator
home furnishing and furniture. It is the world's largest
founded
of a chain in 1943
of stores for
furniture retailer, which specializes, in stylish but inexpensive Scandinavian
designed furniture. At the end of 2005, the IKEA Group of Companies had a
total of 175 stores in 31 countries. In addition, there are 19 IKEA stores owned
and run by franchisees, outside the IKEA Group, in 12 countries. During the
IKEA financial year 2004-2005, 323 million people visited our IKEA stores
around the world.
In Sweden, nature and the home both play a big part in people's lives. In fact,
one of the best ways to describe the Swedish home furnishing style is to
describe nature – full of light and fresh air, yet restrained and unpretentious.
To match up, the artists Carl and Karin Larsson combined classical influences with
warmer Swedish folk styles. They created a model of Swedish home furnishing
design that today enjoys world-wide renown. In the 1950s the styles of modernism
and functionalism developed at the same time as Sweden established a society
founded on social equality. The IKEA product range – modern but not trendy,
functional yet attractive, human-centered and child-friendly – carries on these
various Swedish home furnishing traditions.
The IKEA Concept, like its founder, was born in Småland. This is a part of
southern Sweden where the soil is thin and poor. The people are famous for
working hard, living on small means and using their heads to make the best
possible use of the limited resources they have. This way of doing things is at
the heart of the IKEA approach to keeping prices low.
IKEA was founded when Sweden was fast becoming an example of the caring
society, where rich and poor alike were well looked after. This is also a theme
that fits well with the IKEA vision. In order to give the many people a better
everyday life, IKEA asks the customer to work as a partner. The product range
is child-friendly and covers the needs of the whole family, young and old. So
together we can create a better everyday life for everyone.
In addition to working with around 1,800 different suppliers across the world,
IKEA produces many of its own products through sawmills and factories in the
IKEA industrial group, Swedwood.
Swedwood also has a duty to transfer knowledge to other suppliers, for
example by educating them in issues such as efficiency, quality and
environmental work.
Swedwood has 35 industrial units in 11 countries.
Purchasing: IKEA has 42 Trading Service Offices (TSO's) in 33 countries.
Proximity to their suppliers is the key to rational, long-term co-operation.
That's why TSO co-workers visit suppliers regularly to monitor production, test
new ideas, negotiate prices and carry out quality audits and inspections.
Distribution: The route from supplier to customer must be as direct, cost-
effective and environmentally friendly as possible. Flat packs are an important
aspect of this work: eliminating wasted space means we can transport and
store goods more efficiently. Since efficient distribution plays a key role in the
work of creating the low price, goods routing
and logistics are a focus for constant development.
58 -
The Business Idea: The IKEA business idea is to offer a wide range of home Note
furnishings s
with good design and function at prices so low that as many people as possible will
be
able to afford them. And still have money left! The company targets the customer
who is
looking for value and is willing to do a little bit of work serving themselves,
transporting
the items home and assembling the furniture for a better price. The typical IKEA
customer
is young low to middle income family.
The Competition Advantage: The Competition Advantage Strategy of IKEA's
product is
reflected through IKEA's success in the retail industry. It can be attributed to its vast
experience in the retail market, product differentiation, and cost leadership.
IKEA Product Differentiation: A Wide Product Range The IKEA product range is
wide
and versatile in several ways. First, it's versatile in function. Because IKEA think
customers
shouldn't have to run from one small specialty shop to another to furnish their home,
IKEA gather plants, living room furnishings, toys, frying pans, whole kitchens – i.e.,
everything which in a functional way helps to build a home – in one place, at IKEA
stores.
Second, it's wide in style. The romantic at heart will find choices just as many as the
minimalist at IKEA. But there is one thing IKEA don't have, and that is, the far-out or
the
over-decorated. They only have what helps build a home that has room for good
living.
Third, by being coordinated, the range is wide in function and style at the same time.
No
matter which style you prefer, there's an armchair that goes with the bookcase that
goes
with the new extending table that goes with the armchair. So their range is wide in a
variety of ways.
Cost Leadership: A wide range with good form and function is only half the story.
Affordability has a part to play – the largest part. A wide range with good form and
function is only half the story. Affordability has a part to play – the largest part. And
the
joy of being able to own it without having to forsake everything else. And the
customers
help, too, by choosing the furniture, getting it at the warehouse, transporting it home
and
assembling it themselves, to keep the price low.
Questions
Do you think that IKEA has been successful to utilize Porter's Five force
1. analysis?
Give reasons.
2. Where do you think can IKEA improve?
Source: www.echeat.com
4.3 Industry Analysis
Each business operates among a group of firms that produce competing products or
services known as an “industry”. An industry is thus a group of firms producing
similar products or services. By similar products we mean products that customers
perceive to be substitutes for one another.
Example: Firms that produce and sell textiles such as Reliance Textiles,
Raymond, S. Kumars etc. belong to the textile industry.
Similarly, firms that produce PCs, such as Apple, Compaq, AT&T, IBM, etc. belong to
the microcomputer industry.
59
Notes Although there are usually some differences among competitors, each industry has
its own set
of “rules of combat” governing such issues as product quality, pricing and
distribution. This is
especially true in industries that contain a large number of firms offering
standardized products
and services. As such, it is important for strategic managers to understand the
structure of the
industry in which their firms operate before deciding how to compete successfully.
Industry
analysis is therefore a critical step in the strategic analysis of a firm.
In a perfect world, each firm would operate in one clearly defined industry. However,
many
firms compete in multiple industries, and strategic managers in similar firms often
differ in
their conceptualization of the industry environment. In addition, the advent of
Internet has
completely changed the way business is done. As a result, the process of industry
definition and
analysis can be specially challenging when internet competition is considered.
The basic purpose of industry analysis is to assess the strengths and weaknesses of
a firm
relative to its competitors in the industry. It tries to highlight the structural realities of particular
industry and the extent of competition within that industry. Through industry
analysis, an
organisation can find whether the chosen field is attractive or not and assess its
own position
within the industry.
4.3.1 Framework for Industry Analysis
Industry analysis covers two important components:

← Industry environment
← Competitive environment
The following are the aspects to be covered in the above analysis:
Industry Analysis
← Industry features
← Industry boundaries
← Industry environment
← Industry structure
← Industry performance
← Industry practices
← Industry attractiveness
← Industry prospects for future
Competitive Analysis
Competitive analysis basically addresses two questions:

← Which firms are our competitors?
← What factors shape competition in industry?
60 -
Notes
4.3.2 Industry Analysis
← Industry Features: Industries differ significantly. So, analyzing a company’s

industry begins with identifying the industry’s dominant economic features
and forming a picture of the industry landscape. An industry’s dominant
economic features include such factors as:
← Overall size
← Market growth rate
← Geographic boundaries of the market
← Number and sizes of competitors
← Pace of technological change
← Product innovations etc.
Getting a handle on an industry features promotes understanding of the kinds
of strategic moves that managers should employ. For example, in industries
characterized by one product advance after another, a strategy of continuous
product innovation becomes a condition for survival.
Example: Video games, computers and pharmaceuticals.

← Industry Boundaries: All the firms in the industry are not similar to one
another. Firms within the same industry could differ across various
parameters, such as:
← Breadth of market
← Product/service quality
← Geographic distribution
← Level of vertical integration
← Profit motives
← Industry Environment: Based on their environment, industries are basically of two types:
← Fragmented Industries: A fragmented industry consists of a large number
of small or medium-sized companies, none of which is in a position to
determine industry price. Many fragmented industries are characterized
by low entry barriers and commodity type products that are hard to
differentiate.
← Consolidated Industries: A consolidated industry is dominated by a small
number of large companies (an oligopoly) or in extreme cases, by just
one company (a monopoly). These companies are in a position to
determine industry prices. In consolidated industries, one company’s
competitive actions or moves directly affect the market share of its
rivals, and thus their profitability. When one company cuts prices, the
competitors also cut prices. Rivalry increases as companies attempt to
undercut each other’s prices or offer customers more value in their
products, pushing industry profits down in the process. The consequence
is a dangerous competitive spiral.
According to Michael Porter, industries can be categorized into:
Emerging industries: Are those in the introductory and growth phases
of their life cycle.
-
61
Notes Mature industries: Are those who reached the maturity stage of their
life cycle.
Declining industries: Are those in the transition stage from maturity to

decline.
Global industries: Are those with manufacturing bases and marketing
operations in
several countries.
Competition varies during each stage of industry life cycle.
← Industry Structure: Defining an industry’s boundaries is incomplete without
an understanding of its structural attributes. Structural attributes are the
enduring characteristics that give an industry its distinctive character.
Industry structure consists of four elements:
← Concentration
← Economies of scale
← Product differentiation
← Barriers to entry.
← Concentration: It means the extent to which industry sales are

dominated by only a few firms. In a highly concentrated industry (i.e. an
industry whose sales are dominated by a handful of firms), the intensity
of competition declines over time. High concentration serves as a barrier
to entry into an industry, because it enables the firms to hold large
market shares to achieve significant economies of scale.
← Economies of scale: This is an important determinant of competition in
an industry. Firms that enjoy economies of scale can charge lower prices
than their competitors, because of their savings in per unit cost of
production. They also can create barriers to entry by reducing their
prices temporarily or permanently to deter new firms from entering the
industry.
← Product differentiation: Real perceived differentiation often intensifies
competition among existing firms.
← Barriers to entry: Barriers to entry are the obstacles that a firm must
overcome to enter an industry, and the competition from new entrants
depends mostly on entry barriers.
← Industry attractiveness: Industry attractiveness is dependent on the
following factors:
← Profit potential
← Growth prospects
← Competition
← Industry barriers etc.

As a general proposition, if an industry’s profit prospects are above average, the
industry can be considered attractive; if its profit prospects are below average, it is
considered unattractive. If the industry and competitive situation is assessed as
attractive, firms employ strategies to expand sales and invest in additional facilities
as needed to strengthen their long-term competitive position in business. If the
industry is judged as unattractive, firms may choose to invest cautiously, look for
ways to protect their profitability. Strong companies may consider diversification
into more attractive businesses. Weak companies may consider merging with a
rival to bolster market share and profitability.
62 -
6. Industry performance: This requires an examination of data relating to: Notes
← Production
← Sales
← Profitability
← Technological advancements etc.
← Industry practices: Industry practices refer to what a majority of players in

the industry do with respect to products, pricing, promotion, distribution etc.
This aspect involves issues relating to:
← Product policy
← Pricing policy
← Promotion policy
← Distribution policy
← R&D policy
← Competitive tactics.
← Industry’s future prospects: The future outlook of an industry can be

anticipated based on such factors as:
← Innovation in products and services
← Trends in consumer preferences

← Emerging changes in regulatory mechanisms
← Product life cycle of the industry
← Rate of growth etc.
4.4 Competitive Analysis
The degree of competition in an industry is influenced by a number of forces. To

establish a strategic agenda for dealing with these forces and grow despite them, a
firm must understand:
← How these forces work in an industry?
← How they affect the firm in its particular situation?
The essence of strategy formulation is coping with competition. Intense competition
in an industry is neither a coincidence nor a bad luck. It is rooted in its underlying
economics. There are two theories of economics – theory of monopoly and theory of
perfect competition. These represent two extremes of industry competition. In a
monopoly context, a single firm is protected by barriers to entry, and has an
opportunity to appropriate all the profits generated in the industry.
In a “perfectly competitive” industry, competition is unbridled and entry to the
industry is easy. This kind of industry structure, of course, offers the worst prospects
for long-run profitability. The weaker the forces collectively, however, the greater
the opportunity for superior performance in terms of profit.
According to Porter, “each industry’s attractiveness or profitability potential is a direct
function of the interactions of various environmental forces that determine the nature of
competition”.
-
63
Buyers, suppliers, new entrants and substitute products are all competitive forces.
Notes The state of
competition in an industry is shaped by these forces. The collective strength of
these forces
determines the ultimate profit potential of an industry. It ranges from intense in certain
industries
to mild in certain industries.
Whatever their collective strength, the corporate strategist’s goal is to find a
position in the
industry where his or her company can best defend itself against these forces or
can influence
them in its favour. The strategist must delve below the surface and analyze the
underlying
sources of competition. Knowledge of these underlying sources of competition
helps:
1. To provide the groundwork for a strategic agenda.
2. To highlight the competitive strengths and weaknesses of the company.
3. To animate the positioning of the company in its industry.

4. To clarify the areas where strategic changes may yield the greatest payoff and
To highlight the sources of greatest significance, either as opportunity or
5. thereat.
Understanding these sources will also help in considering areas for
diversification.
The strongest competitive forces determine the profitability of an industry; so,
competitive
analysis is of crucial importance in strategy formulation.
4. Environmental
5 Scanning
Environmental analysis or scanning is the process of monitoring the events and
evaluating trends in the external environment, to identify both present and future
opportunities and threats that may influence the firm’s ability to reach its goals.
Strategists need to analyze a variety of different components of the external
environment, identify “Key Players” within those domains, and be very cognizant of
both threats and opportunities within the environment. It is from such an analysis
that managers can make decisions on whether to react to, ignore, or try to
influence or anticipate future opportunities and threats discovered. The main
purpose of environmental scanning is therefore to find out the correct “fit” between
the firm and its environment, so that managers can formulate strategies to take
advantage of the opportunities and avoid or reduce the impact of threats.
4.5.1 Features of Environmental Analysis
In the context of a changing environment, the process of environmental analysis is

very well comparable to the functions of radar. From this analogy, it is possible to
derive three important features of the process of environmental analysis (Ian
Wilson).
Holistic Exercise
Environmental analysis is a holistic exercise in the sense that it must comprise a

total view of the environment rather than a piecemeal view of trends. It is a process
of looking at the forest, rather than the trees.
Continuous Activity
The analysis of environment must be a continuous process rather than a one – shot
deal. Strategists must keep on tracking shifts in the overall pattern of trends and
carry out detailed studies to keep a close watch on major trends.
64 -
Exploratory Process Notes
Environmental analysis is an exploratory process. A large part of the process seeks

to explore the unknown terrain and the dimensions of possible future. The
emphasis must be on speculating systematically about alternative outcomes,
assessing probabilities, questioning assumptions and drawing rational conclusions.
← Techniques of Environmental Scanning
So far, we have discussed the constituents of macro and operating environment

and how these can become a threat or opportunity. As a corporate strategist, one
has to identify the impact of these environmental forces on firm’s choice of
direction and action.
Environmental analysis involves two phases, viz; information gathering and evaluation.
Glueck and Jauch mention the following sources for environmental analysis:
← Verbal and written information: Verbal information is generally obtained
by direct talk with people, by attending meetings, seminars etc, or through
media. Written or documentary information includes both published and
unpublished material.
← Search and scanning: This involves research for obtaining the required information.
← Spying: Although it may not be considered ethical, spying to get information
about competitor’s business is not uncommon.
← Forecasting: This involves estimating the future trends and changes in the
environment. There are many techniques of forecasting. It can be done by the
corporate planners or consultants.
For the above purpose, firms use a number of tools and techniques depending on
their specific requirements in terms of quality, relevance, cost etc.
Some of the techniques which are generally used for carrying out environmental analysis are:
← PESTEL analysis
← SWOT analysis
← ETOP
← QUEST
← EFE Matrix
← CPM
← Forecasting techniques
← Time series analysis
← Judgmental forecasting
← Expert opinion
← Delphi’s technique
← Multiple scenario
← Statistical modeling
← Cross-impact analysis
-
65
Notes (h) Brainstorming

← Demand/hazard forecasting
The above techniques are briefly discussed below:
PESTEL Analysis
PESTEL Analysis is a checklist to analyse the political, economic, socio-cultural,

technological, environmental and legal aspects of the environment.
While doing PESTEL analysis, it is better to have three or four well-thought-out
items that are justified with evidence than a lengthy list. Although the items in a
PESTEL analysis rely on past events and experience, the analysis can be used as a
forecast of the future. The past is history and strategic management is concerned
with future action, but the best evidence about the future may derive from what
happened in the past. It is worth attempting the task of deciphering this hidden
assumption anyway. For example, when the Warner Brothers invested several
hundred million dollars in the first Harry Porter film, they made an assumption that
the fantasy film market would remain attractive throughout the world. A structured
PESTEL analysis might have given the same outcome even though it is difficult to
predict.
Notes Checklist for a PESTEL Analysis
Political future
Political parties and alignments at local and national level
Legislation, e.g. on taxation and employment law
Relations between government and the organization (possibly influencing the
preceding items in a major way and forming a part of future corporate
strategy)
Government ownership of industry and attitude to monopolies and competition
Socio-cultural future
Shifts in values and culture
Change in lifestyle
Attitudes to work and issues
‘Green’ environmental issues
Education and health
Demographic changes
Distribution of income
Economic future
Total GDP and GDP per head
Inflation
Consumer expenditure and disposable income
Interest rates
Currency fluctuations and exchange rates
Investment – by the state, private enterprise and foreign companies
Cyclicality
Unemployment
Energy costs, transport costs, communication costs, raw material costs
Technological future
Government investment policy
Identified new research initiatives
New patents and products
Contd.
..
66 -
Notes
Speed of change and adoption of new technology
Level of expenditure on R&D by organisation’s rivals
Developments in nominally unrelated industries that might be applicable
Environmental future
‘Green’ issues that affect the environment
Level and type of energy consumed – renewable energy?
Rubbish, waste and its disposal
Legal future
Competition law and government policy
Employment and safety law
Product safety issues
Some strategists may comment that the future is so uncertain that prediction is
useless. If this view were true, then strategic management would not be playing
such a significant role in organisations today. It is recognized that the future cannot
be controlled, but by anticipating the future, organisations can avoid strategic
surprises and be prepared to meet environmental changes.
SWOT Analysis
SWOT analysis is discussed in more detail in Unit 5.
ETOP
Environmental Threats and Opportunities Profile (ETOP) gives a summarized picture

of environmental factors and their likely impact on the organisation. ETOP is
generally prepared as follows.
← List environmental factors: The different aspects of the general as well as
relevant environmental factors are listed. For example, economic environment
can be divided into rate of economic growth, rate of inflation, fiscal policy etc.
← Assess impact of each factor: At this stage, the impact of each factor is
assessed closely and expressed in qualitative (high, medium or low) or
quantitative factors (1, 2, 3). It is to be noted that not all identified
environmental factors will have the same degree of impact. The impact is
assessed as positive or negative.
← Get a big picture: In the final stage, the impact of each factor and its importance
is combined to produce a summary of the overall picture. An example of ETOP is
given below:
Table 4.1: Environmental Threat and Opportunity Profile (ETOP)
Environmental Factors Impact of each factor

Economic (+) Rising income levels
(–) Price competition
Social (–) Change in lifestyles
(–) Change in consumer tastes
Technological (+) Product becomes unique
(–) Acquisition of new technology is expensive
Customer (+) Loyalty is high
(+) Buyer preference for differentiated goods
Supplier (–) High input costs
(+) Improved quality
-
67
Strategic
Management
Notes As observed from the above, the firm can capitalize on rising income levels,
buyer loyalty
to the firm’s products and buyer’s preference for differentiated products even though the
price is high. But this would depend on the firm’s acquisition of latest
technology, which
is expensive. Thus, the preparation of an ETOP provides the strategists with a clear
picture
of which environmental factors have a favourable impact on the firm and
which have an
unfavourable or adverse effect. With the help of an ETOP, a firm can judge where it
stands
with respect to its environment, and such an understanding is helpful in
formulating
appropriate strategies.
Alternative Framework for ETOP
An alternative framework to analyse the impact of threats and opportunities is explained

below:
← The Opportunity and Threat Matrices
( a) The Threat matrix
Hig
h Major threats Moderate threats
Seriousness
Low Moderate threats Minor threats
High Low
Probability of occurrence
A company, after identifying various threats, can use its judgment to

place the threats in any one of the four cells. Thus, for an aluminum
plant, erratic availability and high cost of electrical power, can become a
major threat if the probability of its occurrence is high. Placing this threat
in cell-1 would mean strategic decisions like setting up of a captive
power plant or shifting the plant to another location.
(b)
The Opportunity Matrix
Hig Moderately
Attractiveness
h Very attractive attractive

Moderately
Low attractive Least attractive
High Low
Probability of occurrence
A company based on its own assessment and judgment can place the trends
in various cells. A company’s success probability with a particular opportunity
depends on whether its business strength (i.e., distinctive competence )
matches the success requirements of the industry. For example, entry into
light commercial vehicles was an attractive opportunity for TELCO in which it
had distinctive competence.
← The Impact Matrix: The impact of the trends (opportunities and threats )
on various strategies can be visualized with the help of an impact matrix.
This is discussed below.
After identifying the emerging trends in mega and micro or relevant
environment, the degree of their impact can be assessed with the help of
an impact scale. The matrix enables us to have a summary view of the
impact on different strategies which a firm may be following. The
strategies may relate to various functional
68 -
areas (e.g. marketing, finance, production) with a specific business unit or they may Notes
relate to a specific business unit or to the overall company for all its business units
(e.g. diversification).
← The Impact Scale: We can use a 5 – point impact scale to assess the
‘degree’ and ‘quality’ of impact of each trend on different strategies. The
pattern of scoring can be as follows:
Figure 4.2: The Impact Matrix
Impact on
Trend Probability of strategies
occurrence S1 S2 S3 S4
T1
T2
T3
T4
T1, T2, T3, T4 refer to trends in the environment
S1, S2, S3, S4 refer to strategies
← 2 extremely favourable impact

← 1 moderately favourable impact
0 no impact
– 1 moderately unfavourable impact
– 2 extremely unfavourable impact
Like the Threat and Opportunity Matrices discussed above, we can assign
probability of occurrences for each trend. You would observe that the above
framework gives an objective picture of the impact of the environmental forces on
different strategies of the organisation.
EFE Matrix
Just like ETOP, the External Factor Evaluation Matrix (EFE Matrix) helps to
summarize and evaluate the various components of external environment. The EFE
Matrix can be developed in five steps:
← List 10 to 20 important opportunities and threats.
← Assign a weight to each factor from 0.0 (not important) to 1.0 (most
important). The higher the weight, the more important is the factor to the
current and future success of the company.
← Assign a rating to each factor 1(poor), 2 (average), 3 (above average), 4
(superior). The rating indicates how effectively the firm’s current strategies
respond to that particular factor.
← Multiply each factor’s weight by its rating to determine a weighted score.
← Finally, add the individual weighted scores for all the external factors to
determine the total weighted score for the organisation.
-
69
Notes An example of EFE Matrix for a hypothetical company is given below:
Table 4.2: EFE Matrix for Hypothetical Company
Key external factor Weight Rating Weighted score

Opportunities:
1. Emerging new markets 0.15 2 0.30
2
. Decrease in the cost of components 0.10 3 0.30
3
. Internet use growing rapidly 0.15 3 0.45
4.Trend is to have quality products 0.10 3 0.30
Threats:
1
. Obsolescence of technology 0.10 2 0.20
2.Cheap Chinese imports 0.15 2 0.30
3
. Increase in labour costs due to legislation 0.10 3 0.30
4. Attrition of skilled manpower 0.15 3 0.45
1.00 2.60
The total weighted score indicates how well a particular company is responding to
current and expected factors in the environment. The highest possible total
weighted score will be 4.0 and the lowest will be 1.0. The average score is 2.5. A
score of 4.0 indicates that an organisation is responding in an outstanding way to
existing opportunities and threats. In the example above, the total weighted score
of 2.6 means the company is above average in responding to factors in the
environment.
QUEST
QUEST (Quick Environment Scanning Technique) is a four step process, which uses
scenario-building for environmental analysis.
The four steps are:
← Managers make observations about major events and trends in the
environment.
← They speculate on a wide range of issues that are likely to affect the future of
the business enterprise.
← A report is prepared summarizing the issues and their implications to the firm,
together with 2 to 3 scenarios.
← The report and the scenarios are reviewed by strategists, based on which they
identify feasible options.
Thus, QUEST helps in generating feasible alternative strategies for consideration of
the management.
Competitive Profile Matrix (CPM)
This is a competitor analysis, which focuses on each company against whom a firm
competes directly. It helps to identify the strengths and weaknesses of the major
competitors of the firm, vis-à-vis the firm. Generally, the Critical Success Factors
(CSFs) are compared. In addition, other factors that can be compared are breadth of
product line, sales, distribution, production capacity and efficiency, technological
advantages etc. Using the format shown in Table, a firm can prepare competitor
profile matrix.
70 -
Note
s
Table 4.3: Competitive Profile Matrix (CPM)
COMPETITOR
CRITICAL FIRM COMPETITOR COMPETITOR
SUCCESS FACTOR I II III
Weig Rating Rating
ht Score Score Rating Score Rating Score
← Market share
← Product quality
← Consum
er
loyalty
← Price
competitivene
ss
← Sales
distributio
n
← Custom
er
service
← Global
expansio
n
← Advertising, etc.
After calculating the weighted scores for the firm, and the major competitors, they
are compared to prepare a competitive profile.
Forecasting Techniques
Macro environmental and industry scanning and analysis are only marginally useful
if what they do is to reveal current conditions. To be truly useful, such analysis must
forecast future trends and changes. Forecasting is a way of estimating the future
events that are likely to have a major impact on the enterprise. It is a technique
whereby managers try to predict the future characteristics of the environment to
help managers take strategic decisions. Various techniques are used to forecast
future situations. Important among these are:
← Time series analysis: Extrapolation is the most widely practiced form of
forecasting. Simply stated, extrapolation is the extension of present trends
into the future. It rests on the assumption that the world is reasonably
consistent and changes slowly in the short run. They attempt to carry a series
of historical events forward into the future. Because time series analysis
projects historical trends into the future, its validity depends on the similarity
between past trends and future conditions.
← Judgemental forecasting: This is a forecasting technique in which
employees, customers, suppliers etc., serve as a source of information
regarding future trends. For example, sales representatives may be asked to
forecast sales growth in various product categories based on their interaction
with customers. Survey instruments may be mailed to customers, suppliers or
trade associations to obtain their judgments on specific trends.
← Expert opinion: This is a non-quantitative technique in which experts in a
particular area attempt to forecast likely developments. Knowledgeable
people are selected and asked to assign importance and probability rating to
various future developments. This type of forecast is based on the ability of a
knowledgeable person to construct probable future developments on the
interaction of key variables. The delphi technique is one such technique.
-
71
Delphi Technique: This is a forecasting technique in which the opinion of

Notes 4. experts in the
appropriate field are obtained about the probability of the occurrence of
specified events.
The responses of the experts are compiled and a summary is sent to each
expert. This
process is repeated until consensus is arrived at regarding the forecast of a
particular
event.
Statistical modeling: It is a quantitative technique that attempts to discover
5. causal factors
that link two or more time series together. They use different sets of equations.
Regression
analysis and other econometric methods are examples. Although very useful
for grasping
historical trends, statistical modeling is based on historical data. As the
patterns of
relationships change, the accuracy of the forecast deteriorates.
Cross-impact Analysis: By this analysis, researchers analyze and identify
6. key trends that
will impact all other trends. The question is then put: “If event A occurs, what
will be the
impact on all other trends”. The results are used to build “domino chains”, with
one event
triggering others.
Brainstorming: Brainstorming is a technique to generate a number of
7. alternatives by a
group of 6 to 10 persons. The basic ground rule is to propose ideas without
first mentally
evaluating them. No criticism is allowed. Ideas tend to build on previous ideas
until a
consensus is reached. This is a good technique to create ideas.
Demand/Hazard forecasting: Researchers identify major events that would
8. greatly affect
the firm. Each event is rated for its convergence with several major trends
taking place in
society and its appeal to a group of the public; the higher the event’s
convergence and
appeal, the higher its probability of occurring.
Caselet Scooters wants Bigger Slice of Pizza Market
D URBAN
wasPizza franchise
nudging
yesterday.
group
a R100m Scooters
turnover had
in the passed
year the critical
to February, 50 store
MD Carlo mark said
Gonzaga and
Established in 2000 with the aim of securing half of the R1, 8bn pizza market
within a decade, Scooters lifted turnover 23% in the past year.
The group opened 14 new stores since last February, including an aggressive
launch in
Western Cape.
The move gave the group a national footprint that came after its expansion
into Botswana. Gonzaga said Scooters would open a second store in Botswana
in the new financial year as well as establish at least one store in west Africa.
Gonzaga said west Africa's market afforded the group sufficient size to justify
the establishment and servicing costs associated with an international
expansion.
The group will also open another 15 stores throughout SA, including nine in
Western
Cape to achieve critical mass in that region.
Gonzaga expected Scooters to achieve 20% real growth in the year ahead,
coming from a combination of new stores and increased turnover from
existing shops.
Contd..
.
72 -
He dismissed the possibility of expanding Scooters beyond a pizza delivery Note

company, s
saying the market held sufficient room for expansion without having to acquire
brands
not related to pizzas.
The group has an association with fast-food chain Nando's that affords a cross-
subsidization
on menu and sites.
Gonzaga also dismissed the possibility of listing Scooters on either the JSE
Securities
Exchange or the Alt-X, saying the group financed expansions via its franchisees.
Scooters currently has a 5% share of the pizza market, but Gonzaga aimed to
boost that
tenfold within five years.
Source: Business Day (Electronic Edition), 27 February 2004.
4.6 Summary
External assessment is a step where a firm identifies opportunities that could

benefit it and threats that it should avoid.
It involves monitoring, evaluating, and disseminating of information from the
external and internal environments to key people within the corporation.
The nature and degree of competition in an industry hinge on five forces, viz.
the threat of new entrants, the bargaining power of customers, the bargaining
power of suppliers, the threat of substitute products or services and the
jockeying among current contestants.
To establish a strategic agenda for dealing with these contending currents and
to grow despite them, a company must understand how they work in its
industry and how they affect the company in its particular situation.
The process of conducting external environment assessment starts with
collating information and intelligence on factors affecting the external
environment.
Industry analysis is a tool that facilitates a company's understanding of its
position relative to other companies that produce similar products or services.
Environmental analysis or scanning is the process of monitoring the events
and evaluating trends in the external environment, to identify both present
and future opportunities and threats that may influence the firm's ability to
reach its goals.
4.7 Keywords
Competition: Rivalry between two or more parties to achieve a similar goal.

Environment: The totality of surrounding conditions.
Environmental Scanning: Process of gathering, analyzing, and dispensing
information for tactical or strategic purposes.
Fragmented Industries: Consists of a large number of small or medium-sized
companies, none of which is in a position to determine industry price.
Porters Five Forces: Named after Michael E. Porter, this model identifies and
analyzes 5 competitive forces that shape every industry, and helps determine an
industry's weaknesses and strengths.
Switching Costs: One-time costs that a customer has to bear to switch from one
product to another.
-
73
Strategic
Management
4. Self
Notes 8 Assessment
Fill in the blanks:
At the level of marketing strategy, a competitor has four , .............
1. variables: ................ ...,
................ and ................
Competitors' reactions can be studied
2. at ................ levels.
The five forces and strategic group models present
3. a ................ picture of competition
while emphasizing the role of ................
The shakeout stage ends when the industry enters
4. its ................ stage.
← Under the shakeout stage, ................ are forced out, and a small number of
industry leaders emerge.
The ............ represents all the players in the game and analyses how their
6. .... interactions
affect the firm's ability to generate and appropriate
value.
Buyers, suppliers, new entrants and substitute products ................
7. are all forces.
A primary industry may be considered as a group
8. of ................ , whereas a secondary
industry
includes ................
................, ................ are essential for conducting an environmental
9. and ................ survey.
Analyzing a company's industry begins with identifying the industry's
10. dominant ................
features.
A ............. industry is dominated by a small number of large
11. ... companies.
Defining an industry's boundaries is incomplete without an understanding of its
12. ................
attributes.
Firms that can charge lower prices than their
13. enjoy ................ competitors.
With Porter's framework, a strong competitive force can be regarded as
14. a ................
................ are the one-time costs that a customer has to bear to switch from
15. one product to
another.
The new entrant's need to ................ for the product can create a barrier
16. secure to entry.
4. Review
9 Questions
← "The five forces model provides the rationale for increasing or decreasing
resources commitment". Comment.
← Are there any disadvantages in using Porter's five forces model? Elucidate the
pros and cons of using the model.
← "The five forces theory is a short-sighted theory". Why/why not?
← Discuss Industry analysis using Porter's five forces theory.
← Present at least 7 points to highlight the importance of industry analysis.
← Do you think it is important to define an industry's boundaries? Why/why not?
← Suppose a firm competes in the microcomputer industry. Where in your
opinion, the boundaries of this industry begin and end?
74 -
8. Analyse the features that determine the strength of the competitive forces operating in the
Notes industry.
← "Each industry's attractiveness or profitability potential is a direct function of

the interactions of various environmental forces that determine the nature of
competition." Discuss.
← Is it feasible to create strategic group in any industry? Explain the rationale
behind creating these groups.
← Present a critical assessment of industry life cycle analysis.
← These days, the industry uses a very popular term- hyper-competition. Find
out what it means and elucidate through examples.
product, distribution, price,

1. promotion 2. two
3. static, innovation 4. mature
5. marginal competitors 6. value net

close competitors, less direct
7. competitive 8. competitors
← Industry structure, industry boundaries, industry attractiveness
10. economic 11. consolidated

economies of
12. structural 13. scale
14. threat 15. Switching costs

← distribution channel
4.10 Further Readings
Gregory G. Dess, GT Lumpkin and ML Taylor, Strategic Management–

Books Creating
Competitive Advantage, McGraw-Hill, Irwin, NY, 2003.
Michael Porter, How Competitive Forces Shape Strategy, Harvard
Business
Review, 1979.
John Parnell, Strategic Management – Theory and Practice, Atomic Dog
Publishing.
USA, 2003.
Pearce JA and Robinson RB, Strategic Management, Mc Graw Hill, NY,
2000.
VS Ramaswamy and S.Namakumari, Strategic Planning, Macmillan,
New
Delhi, 1999.
Online links www.businessballs.com/portersfiveforcesofcompetition.

www.investopedia.com/terms/i/industrylifecycleanalysis
www.iimcal.ac.in/community/consclub/reports/ITAndITES
-
75
Strategic
Management
Not Unit 5: Organisational

es
Appraisal:
The Internal Assessment
1
CONTENTS
Objectives
Introduction
← Importance of Internal Analysis
← SWOT Analysis
← Carrying out SWOT Analysis
← Steps in SWOT Analysis
← Critical Assessment of SWOT Analysis
← Advantages and Limitations
← Summary
← Keywords
← Self Assessment
← Review Questions
← Further Readings
Objectives

State the importance of internal analysis
Discuss SWOT analysis
Introduction
Internal analysis is also referred to as “internal appraisal”, “organisational audit”,

“internal corporate assessment” etc. Over the years, research has shown that the
overall strengths and weaknesses of a firm’s resources and capabilities are more
important for a strategy than environmental factors. Even where the industry was
unattractive and generally unprofitable, firms that came out with superior products
enjoyed good profits.
Managers perform internal analysis to identify the strengths and weaknesses of a
firm’s resources and capabilities. The basic purpose is to build on the strengths and
overcome the weaknesses in order to avail of the opportunities and minimize the
effects of threats. The ultimate aim is to gain and sustain competitive advantage in
the marketplace.
76 -
Unit 5: Organisational Appraisal: Internal Assessment 1
Notes
5.1 Importance of Internal Analysis
Strategic management is ultimately a “matching game” between environmental
opportunities and organisational strengths. But, before a firm actually starts tapping
the opportunities, it is important to know its own strengths and weaknesses.
Without this knowledge, it cannot decide which opportunities to choose and which
ones to reject. One of the ingredients critical to the success of a strategy is that the
strategy must place “realistic” requirements on the firm’s resources. The firm
therefore cannot afford to go by some untested assumptions or gut feelings. Only
systematic analysis of its strengths and weaknesses can be of help. This is
accomplished in internal analysis by using analytical techniques like RBV, SWOT
analysis, Value chain analysis, Benchmarking, IFE Matrix etc.
Thus, systematic internal analysis helps the firm:
← To find where it stands in terms of its strengths and weaknesses
← To exploit the opportunities that are in line with its capabilities
← To correct important weaknesses
← To defend against threats
← To asses capability gaps and take steps to enhance its capabilities.
This exercise is also the starting point for developing the competitive advantage
required for the survival and growth of the firm.
Notes The opportunities that can be successfully exploited depend upon the
strengths of its resources and the skills the firm employs to transform those
resources into outputs. In this sense, organisational resources and capabilities
become a lynchpin over which hinges the success and survival of a strategy.
5.2 SWOT Analysis
SWOT stands for strengths, weaknesses, opportunities and threats. SWOT analysis
is a widely used framework to summaries a company’s situation or current position.
Any company undertaking strategic planning will have to carry out SWOT analysis:
establishing its current position in the light of its strengths, weaknesses,
opportunities and threats. Environmental and industry analyses provide information
needed to identify opportunities and threats, while internal analysis provides
information needed to identify strengths and weaknesses. These are the
fundamental areas of focus in SWOT analysis.
SWOT analysis stands at the core of strategic management. It is important to note
that strengths and weaknesses are intrinsic (potential) value creating skills or
assets or the lack thereof, relative to competitive forces. Opportunities and threats,
however, are external factors that are not created by the company, but emerge as
a result of the competitive dynamics caused by ‘gaps’ or ‘crunches’ in the market.
We had briefly mentioned about the meaning of the terms opportunities, threats,
strengths and weaknesses. We revisit the same for purposes of SWOT analysis.
← Opportunities: An opportunity is a major favourable situation in a firm’s
environment. Examples include market growth, favourable changes in
competitive or regulatory framework, technological developments or
demographic changes, increase in demand, opportunity to introduce products
in new markets, turning R&D into cash by licensing or selling patents etc. The
level of detail and perceived degree of realism determine the extent of
opportunity analysis.
-
77
Strategic
Management
Threats: A threat is a major unfavourable situation in a firm’s environment.

Notes 2. Examples
include increase in competition; slow market growth, increased power of
buyers or
suppliers, changes in regulations etc. These forces pose serious threats to a
company
because they may cause lower sales, higher cost of operations, higher cost of
capital,
inability to make break-even, shrinking margins or profitability etc. Your
competitor’s
opportunity may well be a threat to you.
Strengths: Strength is something a company possesses or is good at doing.
3. Examples
include a skill, valuable assets, alliances or cooperative ventures, experienced
sales force,
easy access to raw materials, brand reputation etc. Strengths are not a
growing market,
new products, etc.
Weaknesses: A weakness is something a company lacks or does poorly.
4. Examples include
lack of skills or expertise, deficiencies in assets, inferior capabilities in
functional areas etc.
Though weaknesses are often seen as the logical ‘inverse’ of the company’s
threats, the
company’s lack of strength in a particular area or market is not necessarily a
relative
weakness because competitors may also lack this particular strength.
5.2.1 Carrying out SWOT Analysis
The first thing that a SWOT analysis does is to evaluate the strengths and
weaknesses in terms of skills, resources and competencies. The analyst then should
see whether the internal capabilities match with the demands of the key success
factors. The job of a strategist is to capitalize on the organisation’s strengths while
minimizing the effects of its weaknesses in order to take advantage of opportunities
and overcome threats in the environment. SWOT analysis for a typical firm is given
below (Table 5.1).
5.2.2 Steps in SWOT Analysis
The three important steps in SWOT analysis are:

← Identification
← Conclusion
← Translation
← Identification:
← Identify company resource strengths and competitive capabilities
← Identify company resource weaknesses and competitive deficiencies
← Identify company’s opportunities
← Identify external threats
78 -
Note
Table 5.1: SWOT Analysis s
Strengths Weaknesses
Strong brand image Weak distribution network
High quality products Narrow product lines
Latest technology Rising costs
High intellectual capital Poor marketing plan
Cordial industrial relations
Opportunities Threats
New markets Increase in competition
Profitable new acquisitions Barriers to entry
R&D skills in new areas Change in consumer tastes
New businesses New or substitute products
Threat of takeover
← Conclusion:
← Draw conclusions about the company’s overall situation
← Translation: Translate the conclusions into strategic actions by acting on them:
← Match the company’s strategy to its strengths and opportunities
← Correct important weaknesses
← Defend against external threats
In devising a SWOT analysis, there are several factors that will enhance the quality
of the material:
← Keep it brief, pages of analysis are usually not required.
← Relate strengths and weaknesses, wherever possible, to industry key factors for success.
← Strengths and weaknesses should also be stated in competitive terms, that is,
in comparison with competitors.
← Statements should be specific and avoid blandness.
← Analysis should reflect the gap, that is, where the company wishes to be and
where it is now.
← It is important to be realistic about the strengths and weaknesses of one’s own
and competitive organisations.
Probably the biggest mistake that is commonly made in SWOT analysis is to provide
a long list of points but little logic, argument and evidence. A short list with each
point well argued is more likely to be convincing.
Did u know? What is TOWS Matrix?
TOWS matrix is just an extension of SWOT matrix. TOWS stand for threats,
opportunities, weaknesses and strengths. This matrix was proposed by Heinz
Weihrich as a strategy formulation – matching tool.
79
Strategic
Management
Notes TOWS analysis poses a number of questions:
What actions should a company take? Should it focus on using company’s strengths
to capitalize on opportunities, or acquire strengths in order to be able to capture
opportunities? Or should it actively try to minimize weaknesses and avoid threats?
TOWS matrix illustrates how internal strengths and weaknesses can be matched
with external opportunities and threats to generate four sets of possible alternative
strategies. This matrix can be used to generate corporate as well as business
strategies. An example of TOWS matrix is shown below:
Internal factors/ Strengths(S) Weaknesses(W)

External factors
SO strategies: strategies that
Opportunities(O) use WO strategies: strategies that
strengths to take advantage of take advantage of opportunities
opportunities. by over -coming weaknesses
ST strategies: strategies that
Threats(T) use WT strategies: strategies that
minimize weaknesses and
strengths to avoid threats. avoid
threats.
To generate a TOWS matrix, the following steps are to be followed:

← List external opportunities available in the company’s current and future
environment, in the ‘opportunities block’ on the left side of the matrix.
← List external threats facing the company now and in future in the “threats
block” on the left side of the matrix.
← List the specific areas of current and future strengths for the company, in the
“strengths block” across the top of the matrix.
← List the specific areas of current and future weaknesses for the company in
the “weaknesses box” across the top of the matrix.
← Generate a series of possible alternative strategies for the company based on
particular combinations of the four sets of factors.
The four sets of strategies that emerge are:
SO Strategies
SO strategies are generated by thinking of ways in which a company can use its
strengths to take advantage of opportunities. This is the most desirable and
advantageous strategy as it seeks to mass up the firm’s strengths to exploit
opportunities. For example, Hindustan Lever has been augmenting its strengths by
taking over businesses in the food industry, to exploit the growing potential of the
food business.
ST Strategies
ST strategies use a company’s strengths as a way to avoid threats. A company may

use its technological, financial and marketing strengths to combat a new
competition. For example, Hindustan Lever has been employing this strategy to
fight the increasing competition from companies like Nirma, Procter & Gamble etc.
80 -
WO Strategies Notes
WO Strategies attempt to take advantage of opportunities by overcoming its

weaknesses. For example, for textile machinery manufacturers in India the main
weakness was dependence on foreign firms for technology and the long time taken
to execute an order. The strategy followed was the thrust given to R&D to develop
indigenous technology so as to be in a better position to exploit the opportunity of
growing demand for textile machinery.
WT Strategies
WT Strategies are basically defensive strategies and primarily aimed at minimizing

weaknesses and avoiding threats. For example, managerial weakness may be
solved by change of managerial personnel, training and development etc.
Weakness due to excess manpower may be addressed by restructuring, downsizing,
delayering and voluntary retirement schemes. External threats may be met by joint
ventures and other types of strategic alliances. In some cases, an unprofitable
business that cannot be revived may be divested.
Strategies which utilize a strength to take advantage of an opportunity are generally
referred to as “exploitative” or “developmental strategies”. Strategies which use a
strength to eliminate a weakness may be referred to as “blocking strategies”. Strategies
which overcome a weakness to take advantage of an opportunity or eliminate a threat
may be referred to as “remedial strategies”.
The TOWS matrix is a very useful tool for generating a series of alternative strategies
that the decision-makers of the firm might not otherwise have considered. It can be used
for the company as a whole or it can be used for a specific business unit within a
company. However, it may be noted that the TOWS matrix is only one of many ways to
generate alternative strategies.
Caselet SWOT Analysis of Tata Motors
T ata Limited
Motors began in 1945
is the largest carand has produced
producer more
in India. It than 4 million
manufactures vehicles.
commercial
vehicles, and employs in excess of 23,000 people. This SWOT analysis
andTata Motors
passenger
is about Tata Motors.
Strengths
← The internationalisation strategy so far has been to keep local managers
in new acquisitions, and to only transplant a couple of senior managers
from India into the new market. The benefit is that Tata has been able to
exchange expertise. For example after the Daewoo acquisition the Indian
company leaned work discipline and how to get the final product 'right
first time.'
← The company has a strategy in place for the next stage of its expansion.
Not only is it focusing upon new products and acquisitions, but it also has
a programme of intensive management development in place in order to
establish its leaders for tomorrow.
← The company has had a successful alliance with Italian mass producer
Fiat since 2006. This has enhanced the product portfolio for Tata and Fiat
in terms of production and knowledge exchange. For example, the Fiat
Palio Style was launched by Tata in 2007, and the companies have an
agreement to build a pick-up targeted at Central and South America.
Contd...
-
81
Notes Weaknesses
← The company's passenger car products are based upon 3rd and 4th
generation platforms, which put Tata Motors Limited at a disadvantage
with competing car manufacturers.
← Despite buying the Jaguar and Land Rover brands (see opportunities
below); Tat has not got a foothold in the luxury car segment in its
domestic, Indian market. Is the brand associated with commercial
vehicles and low-cost passenger cars to the extent that it has isolated
itself from lucrative segments in a more aspiring India?
← One weakness which is often not recognised is that in English the word
'tat' means rubbish. Would the brand sensitive British consumer ever buy
into such a brand? Maybe not, but they would buy into Fiat, Jaguar and
Land Rover (see opportunities and strengths).
Opportunities
← In the summer of 2008 Tata Motor's announced that it had successfully
purchased the Land Rover and Jaguar brands from Ford Motors for UK
£2.3 million. Two of the World's luxury car brand have been added to its
portfolio of brands, and will undoubtedly off the company the chance to
market vehicles in the luxury segments.
← Tata Motors Limited acquired Daewoo Motor's Commercial vehicle
business in 2004 for around USD $16 million.
← Nano is the cheapest car in the World - retailing at little more than a
motorbike. Whilst the World is getting ready for greener alternatives to
gas-guzzlers, is the Nano the answer in terms of concept or brand?
Incidentally, the new Land Rover and Jaguar models will cost up to 85
times more than a standard Nano!
← The new global track platform is about to be launched from its Korean
(previously Daewoo) plant. Again, at a time when the World is looking for
environmentally friendly transport alternatives, is now the right time to move
into this segment? The answer to this question (and the one above) is that
new and emerging industrial nations such as India, South Korea and China will
have a thirst for low-cost passenger and commercial vehicles. These are the
opportunities. However the company has put in place a very proactive
Corporate Social Responsibility (CSR) committee to address potential
strategies that will make is operations more sustainable.
← The range of Super Milo fuel efficient buses are powered by super-
efficient, eco-friendly engines. The bus has optional organic clutch with
booster assist and better air intakes that will reduce fuel consumption by
up to 10%.
Threats
← Other competing car manufacturers have been in the passenger car
business for 40, 50 or more years. Therefore Tata Motors Limited has to
catch up in terms of quality and lean production.
← Sustainability and environmentalism could mean extra costs for this low-
cost producer. This could impact its underpinning competitive advantage.
Obviously, as Tata globalises and buys into other brands this problem
could be alleviated.
← Since the company has focused upon the commercial and small vehicle
segments, it has left itself open to competition from overseas companies for
the emerging Indian luxury segments. For example ICICI bank and
DaimlerChrysler have invested in a new Pune-based plant which will build
5000 new Mercedes-Benz per annum. Other
Contd...
82 -
players developing luxury cars targeted at the Indian market include Ford, Note
Honda s
and Toyota. In fact the entire Indian market has become a target for other
global
competitors including Maruti Udyog, General Motors, Ford and others.
← Rising prices in the global economy could pose a threat to Tata Motors
Limited on a couple of fronts. The price of steel and aluminium is
increasing putting pressure on the costs of production. Many of Tata's
products run on Diesel fuel which is becoming expensive globally and
within its traditional home market.
Source: www.marketingteacher.com
5.2.3 Critical Assessment of SWOT Analysis
SWOT analysis is one of the most basic techniques for analyzing firm and industry
conditions. It provides the “raw material” for analyzing internal conditions as well as
external conditions of a firm. SWOT analysis can be used in many ways to aid strategic
analysis. For example, it can be used for a systematic discussion of a firm’s resources
and basic alternatives that emerge from such an analysis. Such a discussion is necessary
because a strength to one firm may be a weakness for another firm, and vice-versa. For
example, increased health consciousness of people is a threat to some firms (e.g.
tobacco) while it is an opportunity to others (e.g. health clubs).
According to Johnson and Sholes (2002), a SWOT analysis summarises the key
issues from the business environment and the strategic capability of an
organisation that impacts strategy development. This can also be useful as a basis
for judging future courses of action. The aim is to identify the extent to which the
current strengths and weaknesses are relevant to, and capable of, dealing with the
changes taking place in the business environment. It can also be used to assess
whether there are opportunities to exploit further the unique resources or core
competencies of the organisation. Overall, SWOT analysis helps focus discussion on
future choices and the extent to which the company is capable of supporting its
strategies.
5.2.4 Advantages and Limitations
Advantages
← It is simple.
← It portrays the essence of strategy formulation: matching a firm’s internal
strengths and weaknesses with its external opportunities and threats.
← Together with other techniques like Value Chain Analysis and RBV, SWOT
analysis improves the quality of internal analysis.
Limitations
← It gives a static perspective, and does not reveal the dynamics of competitive environment.
← SWOT emphasizes a single dimension of strategy (i.e. strength or weakness)
and ignores other factors needed for competitive success.
← A firm’s strengths do not necessarily help the firm create value or competitive advantage.
← SWOT’s focus on the external environment is too narrow.
-
83
Hill and Westbrook criticize SWOT analysis by saying that it is not a panacea.
Notes 5. According
to them, some of the criticisms against SWOT analysis are:
(a) It generates lengthy lists
(b) It uses no weights to reflect priorities
(c) It uses ambiguous words and phrases

The same factor can be placed in two categories (e.g. an opportunity
(d) may also be a
threat).
(e) There is no obligation to verify opinions with data or analysis.

It is only a simple level of analysis. There is no logical link to strategy
(f) implementation.
SWOT helps only as a starting point. By itself, SWOT analysis rarely helps
(g) a firm
develop competitive advantage that it can sustain over time.
In spite of the above criticism and its limitations, SWOT analysis is still a popular
analytical tool used by most organisations. It is definitely a useful aid in generating
alternative strategies, through what is called TOWS matrix.
Task Conduct a SWOT analysis of Vodafone and Airtel.
Case Study
Nokia’s Global Opportunities
Over thetelephone
last 15 years, theAfter
market. Finnish company
dramatic Nokia
growth in has built
recent globalNokia
years,
in making the best strategic choice for continued growth. This
leadership of the
has faced mobile
problems
case explores its strategic decision making and the risks that it now faces.
Background
In the late 1980s, the small Finnish company Nokia was involved in a wide
range of businesses. For example, it made televisions and other consumer
electronics in which it claimed to be ‘third in Europe’. It also had a thriving
business in industrial cables and machinery and manufactured a wide range of
other goods from forestry logging equipment to tyres. It had been expanding
fast since the 1960s and was beginning to struggle under the vast range of
goods that it sold. Sadly, group’s chief executive at that time, Kari Kairamo,
was overwhelmed that he committed suicide. It is rare that strategic pressures
are so intense but the impact on managers of strategy evaluation and
development is an important factor in generating stress.
The Early 1990s
In 1991 and 1992, Nokia lost US$120 millions on its major business activities. The
company had to find new strategies to remedy this situation. It had already cut out
some of its activities but was still left with a telephone manufacturing operation, an
unprofitable TV and video manufacturing business and a strong industrial cables
business. Nokia began the process by seeking a new group chief executive. Its
choice was Jorma Ollila, who had previously run the small Nokia mobile phone
division, which was loss-making at the
Contd...
84 -
time. “My brief was to decide whether to sell it or keep it. After four months, I Note
proposed s
we keep it. We had good people, we had know-how and there was market growth
opportunity”, explained Ollila.
In 1992, Nokia chose to develop two existing divisions that had related technologies:
mobile telephone and telecommunications equipment (switches and exchanges).
Subsequently, it focused mainly on the mobile business but did not pull completely
out of
the telecommunications equipment market.
There were four criteria to justify the strategic choice to focus on mobile telephones:
1. It was judged that the mobile telephone market had great worldwide growth
potential and was growing fast.
2. Nokia already had profitable businesses in this area.

Deregulation and privatisation of tele-communications markets around the
3. world
were providing specific opportunities.
Rapid technological change – especially the new pan-European GSM mobile
4. system
– provided the opportunity to alter fundamentally the balance between
competitors.
Clearly, all the above judgements carried significant risk. In addition, the
company’s strategic choice was limited by constraints on its resources. The
heavy losses of the group overall were a severe financial constraint. In
addition, it was not able to afford the same level of expenditure on research
and development as its two major rivals, Motorola (US) and Ericsson (Sweden).
Moreover, although it had the in-house skills and experience of working with
national deregulated telecommunications operators through competing in
world markets in the 1970s and 1980s, it would need many more employees if
it was to develop the market opportunities. However, by selling off its other
interests and concentrating on mobile telephones it was able to overcome
some of the difficulties.
Looking back on that time, Ollila commented: “In order to be really successful
you have to globalise your organisation and focus your business portfolio. We
have been able to grow and be global and maintain our agility and be fast at
the same time”. What Ollila did not say was that Finland is a small country, so
to build any sizeable business, it is essential to think beyond the country’s
national boundaries.
1992-2000: Building Global Leadership
One of Ollila’s first tasks was to build a management team. He chose two new,
young executives as part of his team: Sari Baldauf as head of Nokia networks and
Matti Alahuhta as head of Nokia mobile telephones. Alahuhta had recently
attended IMD Business School in Switzerland where he had written a dissertation
on how to turn a medium-size technology-based company into a world-class
enterprise against larger rivals with greater resources. He clearly had in mind how
Nokia could compete with competitors like its Swedish rivals Ericsson, the Dutch
company Philips, the French company Alcatel and the American company Motorola,
all of whom had considerably greater resources in terms of finance and technical
knowledge. Alahuhta identified three important factors to help Nokia: first, it was
important to find a new technology that would change the rules of the game and
turn all existing competitors into beginners; second, it was essential to move fast
internationally and respond flexibly as international markets developed; third, the
company had to assess and deliver what customers really wanted from mobile
telephones. Alahuhta did not especially identify one technology development that
proved highly valuable in the early 1990s. This was the agreement within the
European Union to adopt the GSM technical standard for mobile telephones. This
allowed company like Nokia to
Contd...
85
have access to a large market where the technology was standardised and
Notes major economies
of scale were therefore possible. Such a development was important because
the GSM
standard was subsequently used worldwide, with around 500 millions of the
world’s
700 millions mobiles using this standard by 2000. This was fortunate for
companies like
Nokia: “Good luck favours the prepared mind” was Alahuhta’s cryptic comment
some
years later.
Benefits and Problems of Strategic Choice

In fact, Nokia was highly successful in its expansion.: moved rapidly to design
phones that
would appeal to global customers by designing mobile phones that offered
reliability
and ease-of-use. This meant that it had to invest heavily in software
development and it
formed an alliance with the British company, Symbian, subsequently taking a
majority
share in order to ensure that developments remained on track. Nokia was also
single-
minded in its investment in factories in order to deliver economies of scale,
reduce costs
and raise profit margins.
Nokia was particularly good at reading what customers wanted and then
moving quickly
into the market place with new telephones: it realised that the mobile phone
during this
period was almost a fashion accessory and designed phones to reflect this. It
made the
important judgement that the market during the 1990s was moving from being
a high-
tech market into a mass-market, where cheaper, entry-level phones were
required. This
was in sharp contrast to its Nordic competitor, Ericsson, who had remained with
high-tech
phones: “We had the wrong profile in our portfolio,” was the later comment
from Kurt
Hellstrom, Ericsson’s chief executive. By 2000, Nokia had developed a range of
mobile
telephones that were both attractive to look at and innovative in their use of the
new
digital technology that had become available. The result was that by 2000
Nokia was
world leader in mobile telephone manufacture, with 35% global
share.
2000-2005: Coping with New Challenges

Having concentrated its resources into mobile telephones, Nokia then had to
cope with a
major downturn in the world market 2000-2002 which occurred for three main
reasons.
The first reason was that the market became saturated in some parts of the
world – for
example, 80% of people in the EU had mobile telephones. Other markets were
also
becoming saturated – only America lagged behind because of the profusion of
mobile
standards in that market. Even in countries like China and India, around 30% of
the
population had mobiles and the take-up was much higher in Asian countries like
Singapore
and Japan, though the latter country had developed its own technical standards
outside
the GSM system.
The second reason for problems was that the technology bubble of the late
1990s came to
an end in 2001. This left the leading telecommunications companies over-
burdened with
debt and wanting to slash their costs. Sales in Nokia’s telecommunications
equipment
division - related to mobile phones but more associated with the surrounding
infrastructure
of telephone exchanges dropped 50% over three years. Nokia itself had to make
some
7,500 workers redundant in order to recover the situation.
In the mobile phone division of Nokia, there was a third additional problem for
Nokia.
The telephone service providers like Vodafone and Orange were delaying the
introduction
of the next generation of mobile telephone technology for reasons of technical
feasibility
and lack of funds through paying too much for the licenses. The ‘3G’ pure digital
technology
would introduce a whole new market for telephone services that would need a
totally
new series of product designs. In turn, this would require new manufacturing
processes
inside companies like Nokia. The result was that all the mobile telephone
manufacturers,
Contd.
including Nokia, were hit by falling profits in 2001-2002. ..
86 -
The early markets for the new 3G technology were in Japan and Korea, where the Note
GSM s
standard was not used. In addition, some of the Asian electronics manufacturers like
Samsung and Sony realised that the new technology gave them another chance to
enter
the global mobile markets, particularly if they had missed out on the benefits of the
GSM
standard. Sony combined with Ericsson to launch a new joint venture and Samsung
invested
heavily in new 3G technology. The result was that Samsung had built a global market
share of 14% by 2005 and Sony Ericsson had a share of 6%. However, Motorola still
kept its
second position with 17% of the market. Competition was therefore increasing for
Nokia.
New Challenges and New Management

At this point, Nokia lost its way slightly. It failed to read customer demand correctly
around the year 2003/2004. The new ‘clam shell’ folding designs and mid-price photo
imaging screens from its competitors proved popular in the market place. Nokia did
not
move to match these but stuck with its existing ‘stick’ designs. There was some
suggestion
that this may partly have been because Nokia’s economies of scale were more
associated
with its existing designs. Certainly, Nokia had easily the highest profit margins in the
industry and was reluctant to reduce these. Eventually, Nokia decided that its
dominant
world market share was highly valuable and it would be preferable to reduce its
prices,
take a loss of profit margin and also introduce new ‘clam shell’ designs. At the end of
2004,
the company’s share had begun to rise again and was back around 35%.
More generally around 2004, Nokia realised that it needed to review its position. It
had
taken a hit from its competitors and it had failed to read the market changes fully.
Importantly, it also faced new challenges that would come as 3G digital technology
became
the accepted medium of telephony. Essentially, this would open up opportunities that
were unclear but potentially important – live transmission of television to mobile
phones,
new games to mobile phones, instant web access, etc. All these were technically
feasible
but still remained to be exploited fully. New mobile phones needed to be multimedia
and
also needed to consider the extent to which they would converge in terms of
performance
with other consumer electronics like the highly successful Apple iPod.
There was also another new trend that Nokia needed to master. The world market for
mobile telephone providers was becoming more concentrated. Companies like
Vodafone,
Orange, Telekom and others were Nokia’s major customers. The mobile telephone
service
customers were buying around 65-70% of all the world’s mobiles, which they were
then
selling or offering free to customers. The Japanese electronics company Sharp had
been
able to move into mobile telephones from nothing in the early 2000s by doing a deal
to
supply Vodafone with some of its models. This was a serious matter for Nokia since
such
large customers required more than the standard models: customers like Vodafone
wanted
customised phones that would deliver competitive advantages over their rivals and
large
orders meant real bargaining power. Nokia has been hit hard by the strategies of
Samsung,
Motorola and Sony Ericsson. Nokia has responded with a new product range but has
lost
some market share. Nokia needed to introduce a whole new area of customer
management
for such large customers. “It’s a very different era in terms of management
requirements,
in terms of skills, know-how, how you build your customer relationship,” explained
Nokia’s Chief Executive, Ollila.
The outcome of all the above was the introduction of new management at Nokia in
December 2004. ‘From a management point of view, it began in spring or summer
2003
when we in the management team started discussing the need to look at the
organisation
afresh,’ said Ollila. In a period of change in the industry, Nokia needed to adapt and
restructure its management team. The result was that both Sari Baldauf and Matti
Alahuhta
left Nokia. Mr Alahuhta went to a leading position at another Finnish company and
Contd...
87
Baldauf to do something ‘completely different’. Hence, as Nokia faced up to the

Notes new
challenges, it decided that a new organisation structure and a new management
team
would be needed. Ollila commented: “You don’t make generational changes
easily. . . It’s
a big change. But change allows you to reposition, to rethink.” Nokia’s
profitability had
stabilised in the short term but the company needed to think carefully about new
technologies, new trends and new strategic choices.
It was announced that Nokia’s widely admired Chief Executive, Jorma Ollila, would
be
leaving this position in May 2006 but would remain non-executive Chairman. The
Nokia
Management team that guided the company to world leadership in mobile
phones would
largely have left the company.
Questions
Why did Nokia select only one area for development? What risk would it
1. involve?
2. What problems did Nokia face in 2004?

What was the significance of the introduction of the new GSM system for
3. Nokia’s
chosen strategy?
How important was the management team to strategic choice? Did it really
4. have to
change in 2004?
5.3 Summary
The internal environment of an organisation contains the internal resources

and possesses internal capabilities and core competencies.
SWOT Analysis is a strategic planning method used to evaluate the Strengths,
Weaknesses,
Opportunities, and Threats involved in a project or in a business venture.
5.4 Keywords
Opportunities: A time or place favorable for executing a policy/strategy.

Resource: an asset, skill, process or knowledge controlled by an organisation.
SWOT Analysis: Strengths, Weakness, Opportunities and Threat Analysis.
Threat: A major unfavourable situation in a firm's environment.
5.5 Self Assessment
Fill in the blanks:

SWOT stands , ....................., .....................
1. for ..................... and .....................
An ................. is a major favourable situation in a firm's
2. .... environment.
..................... is something a company possesses or is good at
3. doing.
SWOT Analysis provides the "raw material" for and ................
4. analyzing ..................... .....
conditions of a firm.
5. ..................... portrays the essence of strategy formulation.

6. SWOT's focus on the external environment is too .....................
88 -
7. …………………is the starting point of developing competitive advantage. Notes
← Increase in competition and high inflation rate are potential……………………for

a company.
← At the……………….stage of SWOT analysis, companies try to correct their
major weaknesses.
← ……………………matrix is just an extension of the SWOT matrix.
← Suppose you are newly appointed CEO of a retail major. How would you
perform the internal analysis to identify the resources and capabilities of the
firm?
← Analyses the role of internal analysis in strategy formulation.
← What points would you keep in mind to enhance the quality of the material
while devising a SWOT Analysis?
← "SWOT Analysis portrays the essence of strategy formulation". Comment.
← How would you carry out SWOT analysis for a software and electronic media company?
← Critically assess the significance of SWOT Analysis in Strategic Management.
← You are the CEO of a footwear manufacturing company. Your company
manufactures shoes and sandals for both the sexes. The designs of the shoes
and sandals have not changed over the years. Your shoes sold like hot cakes in
early 2000s but now the sales have declined heavily. Analyse the situation and
suggest appropriate solutions to get the company back on track.
← Is it not enough for a company to analyse its own strengths and weaknesses?
Justify your answer
← "SWOT analysis stands at the core of strategic management". Substantiate
← Conduct a SWOT analysis for any two major companies in the FMCG market.
← strengths, weaknesses, opportunities, threats
2. opportunity 3. Strength
4. internal, external 5. SWOT

Internal
6. narrow 7. analysis
8. Threats 9. Translation
TOWS
-
89
Strategic
Management
Notes
AA. Thompson and AJ. Strickland, Strategic Management, Business

Books Publications,
Texas, 1984.
Francis Cherunilam, Strategic Management, Himalaya Publishing Home,
Mumbai,
1998.
Johnson Gerry and Sholes Kevan, Exploring Corporate Strategy, 6th
Edition, Pearson
Education Ltd., 2002.
Michael Porter, Competitive Advantage, Free Press, New York.
Online links mystrategicplan.com/resources/internal-and-external-analysis

www.quickmba.com/strategy/swot
90 -
Unit 6: Organisational Appraisal: Internal
Assessment 2
Unit 6: Organisational Note

s
Appraisal:
Internal Assessment 2
CONTENTS
Objectives
Introduction
Strategy and Culture
Value Chain Analysis
23 Analysis
24 Conducting a Value Chain Analysis
25 Usefulness of the Value Chain

Analysis
Organisational Capability Factors
23 Resources
24 Strategic Importance of Resources
25 Critical Success Factors
Benchmarking
Summary
Keywords
Self Assessment
Review Questions
Further Readings
Objectives

Realise the concept between strategy and
culture
Discuss value chain analysis
Identify organisational capability factors
Describe the concept of benchmarking
-
91
Notes
Introduction
In the previous unit, we discussed about SWOT analysis which is a very important
tool of carrying out internal analysis. In this unit we are going to learn the other
tools that help a company conduct their internal analysis. The corporate level
internal analysis is about identifying your businesses value proposition or core
competencies. These are sometimes referred to as your core capabilities; strategic
competitive advantages or competitive advantage these terms all represent
essentially the same thing. The reason for completing an internal analysis is to
allow you to create an exclusive market position.
6.1 Strategy and Culture
An organisation’s culture can exert a powerful influence on the behaviour of all

employees. It can, therefore, strongly affect a company’s ability to adopt new
strategies. A problem for a strong culture is that a change in mission, objectives,
strategies or policies is not likely to be successful if it is in opposition to the culture
of the company. Corporate culture has a strong tendency to resist change because
its very existence often rests on preserving stable relationships and patterns of
behaviour. For example, the male-dominated Japanese centered corporate culture
of the giant Mitsubishi Corporation created problems for the company when it
implemented its growth strategy in North America. The alleged sexual harassment
of its female employees by male supervisors resulted in lawsuits and a boycott of
the company’s automobiles by women activists.
There is no one best corporate culture. An optimal culture is one that best supports
the mission and strategy of the company. This means that, like structure and
leadership, corporate culture should support the strategy. Unless strategy is in
complete agreement with the culture, any significant change in strategy should be
followed by a change in the organisation’s culture. Although corporate cultures can
be changed, it may often take long time and requires much effort. A key job of
management therefore involves “managing corporate culture”. In doing so,
management must evaluate what a particular change in strategy means to the
corporate culture, assess if a change in culture is needed and decide if an attempt
to change culture is worth the likely costs.
‘FIT’ between Strategy and Culture
A culture grounded in values, practices and behavioural norms that match what is
needed for good strategy implementation, helps energize people throughout the
company to do their jobs in a strategy supportive manner. But when the culture is
in conflict with some aspects of the company’s direction, performance targets, or
strategy, the culture becomes a stumbling block. Thus, an important part of
managing the strategy implementation process is establishing and nurturing a good
‘fit’ between culture and strategy.
92 -
Note
Figure 6.1: Value Chain Analysis
s
Environment
People
Corporate cultures
Labour policies
International issues and culture
Cultural factors specific to the organisation

History and ownership
Size
Technology
Leadership and mission
Cultural Web
Identification of basic cultural

style of the
organisation
Power Note that different
Role groups within the
Task organisation may have
Personal different subcultures
Analysis of the strategic implications

Prescriptive or emergent
Competitive advantage
Strategic change
For this purpose, the main elements of organisational culture, as indicated in Figure
6.1 needs to be analyzed.
Assessing Strategy – Culture Match
When implementing a new strategy, a company should take time to assess

strategy-culture compatibility by considering the following questions:
Is the planned strategy compatible with the company’s current culture? If not,
Can the culture be easily modified to make it more compatible with the new
strategy? If not,
Is management willing and able to make major organisational changes and likely
increase in costs? If not,
Is management still committed to implement the strategy? If not,
Formulate a different strategy. If yes,
Manage cultural change.
Matching Strategy with Culture
When matching strategy with culture, it is important to understand:

There is no ‘best’ and ‘worst’ culture. The issue is how well the culture matches and
supports the strategy of the organisation. Cultural mismatches are likely to
occur when organisations are trying to adapt a new strategy.
This matching of strategy and culture is likely to become embedded over a period
of time. That is, key elements of the strategy and the culture will reinforce
each other gradually. In other words, the relationship between strategy and
culture is usually self-perpetuating, each matching and reinforcing the other
over a period of time.
-
93
Contd...
In many organisations, cohesiveness of culture is found at levels below the
Notes 3. corporate
entity. There is a continuing debate about the extent to which cohesiveness or
diversity of
culture is a strength or a weakness of the organisations.
Can you name few companies that have struggle due to their
Task organisation
culture? Consider one of them and write a short note.
Case Study
Organisational Culture at Southwest Airlines
In 1967, Airwho
Parker, Southwest Co.joined
were later (laterby
Southwest Airlines
Herbert D. Co.) was started by Rollin King and, John
Kelleher.
They wanted to provide the best service with the lowest fares for short-haul,
frequent-flying and point-to-point 'non-interlining' travelers The trio decided to
commence operations in the state of Texas, connecting Houston, Dallas and
San Antonio (which formed the 'Golden Triangle' of Texas). These cities were
growing rapidly and were also too far apart for travelers to commute
conveniently by rail or road. With other carriers pricing their tickets
unaffordably high for most Texans, Southwest sensed an attractive business
opportunity.
Southwest's objective was to provide safe, reliable and short duration air
service at the lowest possible fare. With an average aircraft trip of roughly 400
miles, or a little over an hour in duration, the company had benchmarked its
costs against ground transportation. Southwest focused on short-haul flying,
which was expensive because planes spent more time on the ground relative
to the time spent in the air, thus reducing aircraft productivity. Thus it was
necessary for Southwest to have quick turnarounds of aircraft to minimize the
time its aircraft spend on the ground.
Since its inception, Southwest attempted to promote a close-knit, supportive
and enduring family-like culture. The company initiated various measures to
foster intimacy and informality among employees. Southwest encouraged its
people to conduct business in a loving manner. Employees were expected to
care about people and act in ways that affirmed their dignity and worth.
Instead of decorating the wall of its headquarters with paintings, the company
hung photographs of its employees taking part at company events, news
clippings, letters, articles and advertisements. Colleen Barrett even went on to
send cards to all employees on their birthdays.
The organisational culture of the company was shaped by Kelleher's leadership
also. Kelleher's personality had a strong influence on the culture of Southwest,
which epitomized his spontaneity, energy and competitiveness. "Culture is the
glue that holds our organisation together. It encompasses beliefs,
expectations, norms, rituals, communication patterns, symbols, heroes, and
reward structures. Culture is not about magic formulas and secret plans; it is a
combination of a thousand things", he used to say.
Southwest's culture had three themes: love, fun and efficiency. Kelleher
treated all the employees as a "lovely and loving family". Kelleher knew the
names of most employees and insisted that they referred to him as Herb or
Herbie. Kelleher's personality charmed workers and they reciprocated with
loyalty and dedication. Friendliness and familiarity
also characterized the company's relationships with its customers.
94 -
Kelleher was so much into this culture that he once said, "Nothing kills your Note
company's s
culture like layoffs. Nobody has ever been furloughed [at Southwest], and that is
unprecedented in the airline industry. It's been a huge strength of ours. It's certainly
helped us negotiate our union contracts. One of the union leaders….came in to
negotiate
one time, and he said, "We know we don't need to talk with you about job security."
We
could have furloughed at various times and been more profitable, but I always
thought
that was shortsighted. Post-September 11, 2001, when most airlines in the US went
in for
massive layoffs, Southwest avoided laying off any employee.
Southwest showed its people that it valued them and it was not going to hurt them
just to
get a little more money in the short term. The culture at the organisation spoke
about its
belief in the thought that not furloughing people breeds loyalty. At Southwest, it bred
a
sense of security and trust. So in bad times the organisation took care of them, and
in good
times they're thought, perhaps, "We've never lost our jobs. That's a pretty good
reason to
stick around."...
As a result, Southwest was the only airline to remain profitable in every quarter since
the
September 11 attack. Although its stock price dropped 25% since September 11, it
was still
worth more than all the others big airlines combined. Its balance sheet looked strong
with
a 43% debt-to-equity ratio and it had a cash of $1.8 billion with an additional $575
million
in untapped credit lines. The entire credit to the profit was given to the loyal
employee
base the company had and it could be developed only as a result of the
organisational
culture at Southwest. The company left no stone unturned to boost employee loyalty
and
morale and made many a competitors to follow suit.
Questions
What do you analyse as the most influential characteristic of Southwest's
1. culture?
Do you really think that the reason behind Southwest's profit's was its culture or
2. the
leadership was just playing it humble?
Do you think that following the Southwest way, the other airlines would have
3. also
made profits?
Source: www.ibscdc.com
6.2 Value Chain Analysis

Every organisation consists of a chain of activities that link together to develop the
value of the business. They are basically purchasing of raw materials,
manufacturing, distribution, and marketing of goods and services. These activities
taken together form its value chain. The value chain identifies where the value is
added in the process and links it with the main functional parts of the organisation.
It is used for developing competitive advantage because such chains tend to be
unique to an organisation. It then attempts to make an assessment of the
contribution that each part makes to the overall added value of the business.
Essentially, Porter linked two areas together:
the added value that each part of the organisation contributes to the whole
organisation; and
the contribution that each part makes to the competitive advantage of the whole
organisation.
In a company with more than one product area, the analysis should be conducted
at the level of product groups, not at corporate strategy level.
Value Chain thus views the organisation as a chain of value-creating activities.
Value is the amount that buyers are willing to pay for what a product provides
them. A firm is profitable to
95
the extent the value it receives exceeds the total cost involved in creating its
Notes products. Creating
value for buyers that exceeds the cost of production (i.e. margin) is a key concept
used in
analyzing a firm’s competitive position.
Notes The concept of value chain analysis was introduced by Michael Porter in 1985
in his seminal book “Competitive Advantage”. This concept is derived from an
established accounting practice that calculates the value added to a product by
individual stages in a manufacturing or service process. Porter has applied this idea
to the activities of an organisation as a whole, arguing that it is necessary to
examine activities separately in order to identify sources of competitive advantage.
According to Porter, customer value is derived from three basic sources.

Activities that differentiate the product
Activities that lower its costs
Activities that meet the customer’s need quickly.
Competitive advantage, argues Michael Porter (1985), can be understood only by
looking at a firm as a whole, and cost advantages and successful differentiation are
found in the chain of activities that a firm performs to deliver value to its
customers.
6.2.1 Analysis
According to Porter, value chain activities are divided into two broad categories, as
shown in the figure.
Primary activities
Support activities
Primary activities contribute to the physical creation of the product or service, its
sale and transfer to the buyer and its service after the sale.
Support activities include such activities as procurement, HR etc. which either
add value by themselves or add value through primary activities and other support
activities.
Advantage or disadvantage can occur at any one of the five primary and four
secondary activities, which together form the value chain for every firm.
Primary Activities
Inbound Logistics
These activities focus on inputs. They include material handling, warehousing,

inventory control, vehicle scheduling, and returns to suppliers of inputs and raw
materials.
Operations
These include all activities associated with transforming inputs into the final
product, such as production, machining, packaging, assembly, testing, equipment
maintenance etc.
96 -
Outbound Logistics Notes
These activities are associated with collecting, storing, physically distributing the
finished products to the customers. They include finished goods warehousing,
material handling and delivery, vehicle operation, order processing and scheduling.
Marketing and Sales
These activities are associated with purchase of finished goods by the customers
and the inducement used to get them buy the products of the company. They
include advertising, promotion, sales force, channel selection, channel relations and
pricing.
Figure 6.2: Value Chain Analysis
Infrastructure
Human Resource Management

Activities
Support
M
arg
Technology Development in
Procurement
Marketing and Sales
Outbond Logistics
Inbound Logistics
Operations
M
r a
Services
i g
Primary Activities
Services
This includes all activities associated with enhancing and maintaining the value of
the product. Installation, repair, training, parts supply and product adjustment are
some of the activities that come under services.
Support Activities
Procurement
Activities associated with purchasing and providing raw materials, supplies and
other consumable items as well as machinery, laboratory equipment, office
equipment etc.
Porter refers to procurement as a secondary activity, although many purchasing
gurus would argue that it is (at least partly) a primary activity. Included are such
activities as purchasing raw materials, servicing, supplies, negotiating contracts
with suppliers, securing building leases and so on.
-
97
Notes Technology Development
Activities relating to product R&D, process R&D, process design improvements,

equipment design, computer software development etc.
Human Resource Management
Activities associated with recruiting, hiring, training, development, compensation,

labour relations, development of knowledge-based skills etc.
Firm Infrastructure
Activities relating to general management, organisational structure, strategic

planning, financial and quality control systems, management information systems
etc.
Johnson and Sholes (2002) observe that few organisations undertake all activities from
production of raw materials to the point–of–sale of finished products themselves. But, the
value chain exercise must incorporate the whole process, that is, the entire value
system. This means, for example, that even if an organisation does not produce its own
raw materials, it must nevertheless seek to identify the role and impact of its supply
sources on the final product. Similarly, even if it is not responsible for after-sales service,
it must consider how the performance of those who deliver the service contribute to
overall product/service cost and quality.
6.2.2 Conducting a Value Chain Analysis
Value chain analysis involves the following steps.
Identify Activities
The first step in value chain analysis is to divide a company’s operations into
specific activities and group them into primary and secondary activities. Within
each category, a firm typically performs a number of discrete activities that may
reflect its key strengths and weaknesses.
Allocate Costs
The next step is to allocate costs to each activity. Each activity in the value chain
incurs costs and ties up time and assets. Value chain analysis requires managers to
assign costs and assets to each activity. It views costs in a way different from
traditional cost accounting methods. The different method is called activity-based
costing.
Identify the Activities that Differentiate the Firm
Scrutinizing the firm’s value chain not only reveals cost advantages or
disadvantages, but also identifies the sources of differentiation advantages relative
to competitors.
Examine the Value Chain
Once the value chain has been determined, managers need to identify the activities
that are critical to buyer satisfaction and market success. This is essential at this
stage of the value chain analysis for the following reasons:
If the company focuses on low-cost leadership, then managers should keep a strict
vigil on costs in each activity. If the company focuses on differentiation,
advantage given by each activity must be carefully evaluated.
98 -
2. The nature of value chain and the relative importance of each activity within it, vary from
Notes industry to industry.
The relative importance of value chain can also vary by a company’s position in a
broader value system that includes value chains of upstream suppliers and
downstream distributors and retailers.
The interrelationships among value-creating activities also need to be evaluated.
The final basic consideration in applying value chain analysis is the need to use a
comparison when evaluating a value activity as a strength or weakness. In this
connection, RBV and SWOT analysis will supplement the value chain analysis.
To get the most out of the value-chain analysis, as already noted, one needs to
view the concept in a broader context. The value chain must also include the firm’s
suppliers, customers and alliance partners. Thus, in addition to thoroughly
understanding how value is created within the organisation, one must also know
how value is created for other organisations involved in the overall supply chain or
distribution channel in which the firm participates.
Therefore, in assessing the value chains there are two levels that must be addressed.
Interrelationships among the activities within the firm.
Relationships among the activities within the firm and with other organisations that
are a part of the firm’s expanded value chain.
6.2.3 Usefulness of the Value Chain Analysis
The value chain analysis is useful to recognize that individual activities in the
overall production process play an important role in determining the cost, quality
and image of the end-product or service. That is, each activity in the value chain
can contribute to a firm’s relative cost position and create a basis for differentiation,
which are the two main sources of competitive advantage. While a basic level of
competence is necessary in all value chain activities, management needs to
identify the core competences that the organisation has or needs to have to
compete effectively. Analyzing the separate activities in the value chain helps
management to address the following issues:
Which activities are the most critical in reducing cost or adding value? If quality is a
key consumer value, then ensuring quality of supplies would be a critical
success factor.
What are the key cost or value drivers in the value chain?
What linkages help to reduce cost, enhance value or discourage imitation?
How do these linkages relate to the cost and value drivers?
Porter identified the following as the most important cost and value drivers:
Cost Drivers
Economies of scale
Pattern of capacity utilization (including the efficiency of production processes and

labour productivity)
Linkages between activities (for example, timing of deliveries affect storage costs,
just-in time system minimizes inventory costs)
Interrelationships (for example, joint purchasing by two units reduces input costs)
-
99
Notes 5. Geographical location (for example, proximity to supplies reduces input costs)
Policy choices (such as the choices on the product mix, the number of suppliers
used, wage costs, skills requirements and other human resource policies affect
costs)
Institutional factors (which include political and legal factors, each of which can
have a significant impact on costs).
Value Drivers
Value drivers are similar to cost drivers, but they relate to other features (other
than low price) valued by buyers. Identifying value derivers comes from
understanding customer requirements, which may include:
Policy choices (choices such as product features, quality of input materials,
provision of customer services and skills and experience of staff).
Linkages between activities (for example, between suppliers and buyers; sales and
after-sales staff).
The cost and value drivers vary between industries. The value chain concept shows that
companies can gain competitive advantage by controlling cost or value drivers and/or
reconfiguring the value chain, that is, a better way of designing, producing, distributing
or marketing a product or service. For example, Ryanair has become one of the most
profitable airlines in Europe through concentrating on the parts of its value chain, such
as ticket transaction costs, no frills etc.
6.3 Organisational Capability Factors
Organisations capabilities lies in its resources. The resources are the means by
which an organisation generates value. It is this value that is then distributed for
various purposes. Resources and capabilities of a firm can be best explained with
the help of Resource Based View (RBV) of a firm which is popularized by Barney.
RBV considers the firm as a bundle of resources – tangible resources, intangible
resources, and organisational capabilities. Competitive advantage, according to this
view, generally arises from the creation of bundles of distinctive resources and
capabilities.
6.3.1 Resources
A ‘resource’ can be an asset, skill, process or knowledge controlled by an

organisation. From a strategic perspective, an organisation’s resources include both
those that are owned by the organisation and those that can be accessed by the
organisation to support its strategies. Some strategically important resources may
be outside the organisation’s ownership, such as its network of contacts or
customers.
Typically, resources can be grouped into four categories:
Physical resources include plant and machinery, land and buildings, production
capacity etc.
Financial resources include capital, cash, debtors, creditors etc.
Human resources include knowledge, skills and adaptability of human resources.
Intellectual capital is an intangible resource of an organisation. This includes the
knowledge that has been captured in patents, brands, business systems,
customer databases and relationships with partners. In a knowledge-based
economy, intellectual capital is likely to be the major asset of many
organisations.
100 -
Capabilities Notes
Resources are not very productive on their own. They need organisational
capabilities. Organisational capabilities are the skills that a firm employs to
transform inputs into outputs. They reflect the ability of the firm in combining
assets, people and processes to bring about the desired results. Prahalad and
Hamel describe an organisational competence as a “bundle of skills and
technologies”, which are integrated in people skills and business processes.
Capabilities are, therefore a function of the firm’s resources, their application and
organisation, internal systems and processes, and firm specific skill sets.
Capabilities are rarely unique, and can be acquired by other firms as well in that
industry. Some of these capabilities may become “distinctive competencies”, when
a firm performs them better than its rivals.
Core Competence
Superior performance does not merely come from resources alone because they can be
imitated or traded. Superior performance comes by the way in which the resources are
deployed to create competences in the organisation’s activities. For example, the
knowledge of an individual will not improve an organisation’s performance unless he or
she is allowed to work on particular tasks which exploit that knowledge. Although an
organisation will need to achieve a threshold level of competence in all of the activities
and processes, only some will become core competences.
Core competence refers to that set of distinctive competencies that provide a firm
with a sustainable source of competitive advantage. Core competencies emerge
over time, and reflect the firm’s ability to deploy different resources and capabilities
in a variety of contexts to gain and sustain competitive advantage.
Core competences are activities or processes that are critically required by an
organisation to achieve competitive advantage. They create and sustain the ability
to meet the critical success factors of particular customer groups better than their
competitors in ways that are difficult to imitate. In order to achieve this advantage,
core competences must fulfill the following criteria.
It must be:
an activity or process that provides customer value in the product or service features.
an activity or process that is significantly better than competitors.
an activity or process that is difficult for competitors to imitate.
Task Enlist at least five types of resources that all organisations have.
An organisation uses different types of resources and exhibits a certain type of

organisational capabilities to leverage those resources to bring about a competitive
advantage, as shown in Figure 6.3.
It is important to emphasize that resources by themselves do not yield a
competitive advantage. Those resources need to be integrated into value creating
activities. Thus the central theme of RBV is that competitive advantage is created
and sustained through the bundling of several resources in unique combinations.
Thus,
Competence is something an organisation is good at doing.
Core competence is a proficiently performed internal activity.
-
101
Notes 3. Distinctive competence is an activity that a company performs better than its
rivals.
Distinctive competencies become the basis for competitive advantage.
Figure 6.3: Creation of Competitive Advantage
Competitive Advantage
Distinctive competencies
Core competencies
Competencies
Strengths and weaknesses
Tangible and intangible Organizational capabilities

resources
Barney, in his VRIO framework of analysis, suggests four questions to evaluate a

firm’s key resources.
Value: Does it provide competitive advantage?
Rareness: Do other competitors possess it?
Imitability: Is it costly for others to imitate?
Organisation: Is the firm organised to exploit the resource?
If the answer to these questions is “yes” for a particular resource, that resource is
considered a strength and a distinctive competence.
Using Resources to Gain Competitive Advantage: Grant proposes a five-step resource based
approach to strategy analysis.
Identify and classify the firm’s resources in terms of strengths and weaknesses.
Combine the firm’s strengths into specific capabilities.
Appraise the profit potential of these resources and capabilities.
Select the strategy that best exploits the firm’s resources and capabilities relative
to external opportunities.
Identify resource gaps and invest in overcoming weaknesses.
6.3.2 Strategic Importance of Resources
Johnson and Sholes (2002 ) explain the strategic importance of resources with the
concept of ‘strategic capability’. According to them, strategic capability is the ability
of an organisation to put its resources and capabilities to the best advantage so as
to enable it to gain competitive advantage. There are three type of resources:
Available Resources
Strategic capability depends on the resources available to an organisation because it is

the resources used in the activities of the organisation that create competences. As
already explained
102 -
above, resources can be typically grouped under four headings: Physical resources, Note
human s
resources, financial resources and intellectual capital.
Threshold Resources
A set of basic resources are needed by a firm for its existence and survival in the
marketplace. These resources are called ‘threshold resources’. But this threshold
tends to increase with time. So, a firm needs to continuously improve this threshold
resource base just to stay in business.
Figure 6.4: Resources, Competences and Competitive Advantage
Same as competitors’ Better than competitors’

or easy to imitate and difficult to imitate*
Threshold Unique
RESOURCES resources resources
Threshold Core
COMPETENCES
competences competences
*Provides the basis to outperform competitors or demonstratably provide better value for money
Unique Resources
Unique resources are those resources that are critically required to achieve
competitive advantage. They are better than competitors’ resources and are
difficult to imitate. The ability of an organisation to meet the critical success factors
in a particular market segment depends on these unique resources. To illustrate
unique resources, Johnson and Sholes quote the example of some libraries having
unique collection of books, which contain knowledge not available elsewhere, and
the example of retail stores located in prime locations, which can charge higher
than average prices. Similarly, some organisations have patented products or
services that are unique, which give them advantage.
!
Caution For service organisations, unique resources may be particularly talented
individuals – such as surgeons or teachers or lawyers. But they may leave the
organisation or poached by a rival. So, trying to sustain long-term advantage only
through unique resources may be very difficult.
6.3.3 Critical Success Factors
Critical Success Factors (CSFs) are defined as the resources, skills and attributes of
an organisation that are essential to deliver success in the market place. CSFs are
also called “Key Success Factors” (KSFs) or “Strategic Factors”. They are the key
factors which are critical for organisational success and survival.
Critical success factors will vary from one industry to another. For example, in the
perfume and cosmetics industry, the critical success factors include branding,
product distribution and product performance, but are unlikely to include low labour
costs, which is a very important CSF for steel companies. CSFs can be used to
identify elements of the environment that are particularly worth exploring.
-
103
Notes It is very important to identify the CSFs for a particular industry. Many elements
relate not only
to the environment but also to the resources of organisations in the industry. To
identify the CSFs
in an industry, it is therefore useful to examine the type of resources and the way
they are
employed in the industry and then use this information to analyze the environment
outside the
organisation. Hence CSFs require an exploration of the resources and skills of the
industry
before they can be applied to the environment.
Importance of Critical Success Factors
The Japanese strategist Kenichi Ohamae, the former head of the management
consultants Mc
Kinsey, in Japan, has suggested that the CSFs (or key success factors, as he calls
them) are likely
to deliver the company’s objectives. He argues that, when resources of capital,
labour and time
are scarce, it is important that they should be concentrated on the key activities of
the firm, that
is, those activities that are considered most important to the delivery of whatever the
organisation
regards as success.
Ohamae treats CSFs as a basic business strategy for competing wisely in any
industry. He
suggests identifying the CSFs in an industry or business and then to “inject
resources into the
most important business functions.” The aim is to invest in the parts of the company that matter
most for its success.
Rockart (1979) has applied the CSFs approach to several organisations through a
three step
process for determining CSFs. These steps are:
1. Generate CSFs (asking, What does it take to be successful in business?)
2. Convert CSFs into objectives (asking, “What should the organisation’s goals and
objectives
be with respect to CSFs)
3. Set Performance standards (asking “How will we know whether the
organisation has
been successful in this factor?”)
Rockart has also identified four major sources of CSFs:
1. Structure of the industry: Some CSFs are specific to the structure of the
industry. For
example, the extent of service support expected by the customers. Automobile
companies
have to invest in building a national network of authorized service stations to
ensure
service delivery to their customers.
2. Competitive strategy, industry position and geographic location: CSFs
also arise from
the above factors. For example, the large pool of English-speaking manpower
makes
India an attractive location for outsourcing the BPO needs of American and
British firms.
3. Environmental factors: CSFs may also arise out of the general/business
environment of
a firm, like the deregulation of Indian Industry. With the deregulation of
telecommunications industry, many private companies had opportunities of
growth.
4. Temporal factors: Certain short-term organisational developments like
sudden loss of
critical manpower (like the charismatic CEO) or break-up of the family owned
business, may necessitate CSFs like “appointment of a new CEO” or
“rebuilding the company image”. Temporarily such CSFs would remain CSFs till
the time they are achieved.
6.4 Benchmarking
Benchmarking is the process of comparing the business processes and performance

metrics including cost, cycle time, productivity, or quality to another that is widely
considered to be an industry standard benchmark or best practice. Essentially,
benchmarking provides a snapshot of the performance of a business and helps one
understand where one is in relation to a particular
104 -
standard. The result is often a business case and "Burning Platform" for making changes Note
in order s
to make improvements.
Also referred to as "best practice benchmarking" or "process benchmarking", it is a
process used
in management and particularly strategic management, in which organisations evaluate
various
aspects of their processes in relation to best practice companies' processes, usually
within a peer
group defined for the purposes of comparison. This then allows organisations to develop
plans
on how to make improvements or adapt specific best practices, usually with the aim of
increasing
some aspect of performance. Benchmarking may be a one-off event, but is often treated
as a
continuous process in which organisations continually seek to improve their practices.
Types of Benchmarking
Benchmarking can be of following types:

Process benchmarking: the initiating firm focuses its observation and
investigation of business processes with a goal of identifying and observing
the best practices from one or more benchmark firms. Activity analysis will be
required where the objective is to benchmark cost and efficiency; increasingly
applied to back-office processes where outsourcing may be a consideration.
Financial benchmarking: performing a financial analysis and comparing the
results in an effort to assess your overall competitiveness and productivity.
Benchmarking from an investor perspective: extending the benchmarking
universe to also compare to peer companies that can be considered
alternative investment opportunities from the perspective of an investor.
Performance benchmarking: allows the initiator firm to assess their competitive
position by comparing products and services with those of target firms.
Product benchmarking: the process of designing new products or upgrades to
current ones. This process can sometimes involve reverse engineering which
is taking apart competitors products to find strengths and weaknesses.
Strategic benchmarking: involves observing how others compete. This type is
usually not industry specific, meaning it is best to look at other industries.
Functional benchmarking: a company will focus its benchmarking on a single
function in order to improve the operation of that particular function. Complex
functions such as Human Resources, Finance and Accounting and Information
and Communication Technology are unlikely to be directly comparable in cost
and efficiency terms and may need to be disaggregated into processes to
make valid comparison.
Best-in-class benchmarking: involves studying the leading competitor or the
company that best carries out a specific function.
Operational benchmarking: embraces everything from staffing and productivity
to office flow and analysis of procedures performed.
There is no single benchmarking process that has been universally adopted. The
wide appeal and acceptance of benchmarking has led to various benchmarking
methodologies emerging. The first book on benchmarking, written by Kaiser
Associates, offered a 7-step approach. Robert Camp (who wrote one of the earliest
books on benchmarking in 1989) developed a 12-stage approach to benchmarking.
-
105
Strategic
Management
Notes The 12 stage methodology consisted of:
Select subject ahead

Define the process
Identify potential partners
Identify data sources
Collect data and select partners
Determine the gap
Establish process differences
Target future performance
Communicate
Adjust goal
Implement
Review/recalibrate.
The following is an example of a typical benchmarking methodology:
Identify your problem areas: Because benchmarking can be applied to any business
process or function, a range of research techniques may be required. They include:
informal conversations with customers, employees, or suppliers; exploratory
research techniques such as focus groups; or in-depth marketing research,
quantitative research, surveys, questionnaires, re-engineering analysis, process
mapping, quality control variance reports, or financial ratio analysis. Before
embarking on comparison with other organisations it is essential that one knows
one's own organisation's function, processes; base lining performance provides a
point against which improvement effort can be measured.
Identify other industries that have similar processes: For instance if one
were interested in improving hand offs in addiction treatment he/she would try
to identify other fields that also have hand off challenges. These could include
air traffic control, cell phone switching between towers, transfer of patients
from surgery to recovery rooms.
Identify organisations that are leaders in these areas: Look for the very best
in any industry and in any country. Consult customers, suppliers, financial
analysts, trade associations, and magazines to determine which companies
are worthy of study.
Survey companies for measures and practices: Companies target specific
business processes using detailed surveys of measures and practices used to
identify business process alternatives and leading companies. Surveys are
typically masked to protect confidential data by neutral associations and
consultants.
Visit the "best practice" companies to identify leading edge practices:
Companies typically agree to mutually exchange information beneficial to all
parties in a benchmarking group and share the results within the group.
Implement new and improved business practices: Take the leading edge
practices and develop implementation plans which include identification of
specific opportunities, funding the project and selling the ideas to the
organisation for the purpose of gaining demonstrated value from the process.
106 -
Notes
Caselet XEROX – Benchmarking Story
T he history of Xerox made

time inventor, goes back to 1938,
the first when Chester
xerographic Carlson,
image in the US.aCarlson
patent attorney
struggledand
five years to sell the invention, as many companies did not believe there
for part-
over
was a market for it. Finally, in 1944, the Battelle Memorial Institute in
Columbus, Ohio, contracted with Carlson to refine his new process, which
Carlson called 'electrophotography.' Three years later, The Haloid Company,
maker of photographic paper, approached Battelle and obtained a license to
develop and market a copying machine based on Carlson's technology.
Haloid later obtained all rights to Carlson's invention and registered the 'Xerox'
trademark in 1948. Buoyed by the success of Xerox copiers, Haloid changed its
name to Haloid Xerox Inc in 1958, and to The Xerox Corporation in 1961. Xerox
was listed on the New York Stock Exchange in 1961 and on the Chicago Stock
Exchange in 1990. It is also traded on the Boston, Cincinnati, Pacific Coast,
Philadelphia, London and Switzerland exchanges. The strong demand for
Xerox's products led the company from strength to strength and revenues
soared from $37 millions in 1960 to $268 millions in 1965.
Throughout the 1960s, Xerox grew by acquiring many companies, including University
Microfilms, Micro-Systems, Electro-Optical Systems, Basic Systems and Ginn and Company.
In 1962, Fuji Xerox Co. Ltd. was launched as a joint venture of Xerox and Fuji Photo Film.
Xerox acquired a majority stake (51.2%) in Rank Xerox in 1969. During the late
1960s and the early 1970s, Xerox diversified into the information technology
business by acquiring Scientific Data Systems (makers of time-sharing and
scientific computers), Daconics (which made shared logic and word processing
systems using minicomputers), and Vesetec (producers of electrostatic
printers and plotters).
In 1969, it set up a corporate R&D facility, the Palo Alto Research Center
(PARC), to develop technology in-house. In the 1970s, Xerox focused on
introducing new and more efficient models to retain its share of the
reprographic market and cope with competition from the US and Japanese
companies. While the company's revenues increased from $ 698 millions in
1966 to $ 4.4 billions in 1976, profits increased five-fold from $ 83 millions in
1966 to $ 407 millions in 1977. As Xerox grew rapidly, a variety of controls and
procedures were instituted and the number of management layers was
increased during the 1970s. This, however, slowed down decision-making and
resulted in major delays in product development.
In the early 1980s, Xerox found itself increasingly vulnerable to intense
competition from both the US and Japanese competitors. According to
analysts, Xerox's management failed to give the company strategic direction.
It ignored new entrants (Ricoh, Canon, and Sevin) who were consolidating
their positions in the lower-end market and in niche segments. The company's
operating cost (and therefore, the prices of its products) was high and its
products were of relatively inferior quality in comparison to its competitors.
Xerox also suffered from its highly centralized decision-making processes. As a
result of this, return on assets fell to less than 8% and market share in copiers
came down sharply from 86% in 1974 to just 17% in 1984. Between 1980 and
1984, Xerox's profits decreased from $ 1.15 billions to $ 290 millions.
Contd...
-
107
In 1982, David T. Kearns (Kearns) took over as the CEO. He discovered that the
Notes average
manufacturing cost of copiers in Japanese companies was 40-50% of that of
Xerox. As a
result, Japanese companies were able to undercut Xerox's prices effortlessly.
Kearns quickly
began emphasizing reduction of manufacturing costs and gave new thrust to
quality
control by launching a program that was popularly referred to as 'Leadership
Through
Quality.' As part of this quality program, Xerox implemented the benchmarking
program.
These initiatives played a major role in pulling Xerox out of trouble in the years to
come.
The company even went on to become one of the best examples of the
successful
implementation of benchmarking.
Source: www.icmrindia.org
6.5 Summary
Culture is a powerful component of an organisation's success, laying the

tracks for strategy to roll out on.
It is the foundation for profit, productivity and progress. While it can accelerate
getting to the next level of performance, it can just as easily act as drag.
Culture-strategy Fit is a leading organisational culture consulting firm
conducting ground breaking culture diagnosis and change projects to help
organisations leverage their culture to drive strategy and performance.
It involves specifying the objective of the business venture or project and
identifying the internal and external factors that are favorable and unfavorable to
achieving that objective.
A value chain is a chain of activities.
Products pass through all activities of the chain in order and at each activity
the product gains some value.
The chain of activities gives the products more added value than the sum of
added values of all activities.
It is important not to mix the concept of the value chain with the costs
occurring throughout the activities.
Benchmarking is an improvement tool whereby a company measures its
performance or process against other companies' best practices, determines
how those companies achieved their performance levels.
Benchmarking uses the information to improve its own performance.
6.6 Keywords
Assimilation: The acquired firm willingly surrenders its culture and adopts the
culture of the acquiring company.
Benchmarking: The concept of discovering what is the best performance being
achieved, whether in your company, by a competitor, or by an entirely different
industry.
Cultural Fit: Compatibility of culture with other arenas.
Deculturation involves imposition of the acquiring firm's culture forcefully on the
acquired firm.
108 -
Integration involves merging the two cultures in such a way that separate cultures of Note
both firms s
are preserved in the resulting culture.
Value Chain: Value chain is 'a string of companies working together to satisfy market
demands.'
6.7 Self Assessment
Fill in the blanks:

An can exert a powerful influence on the behaviour of
1. organisation's ..................... all
employees.
An optimal culture is one that best supports an ..................... of the
2. the ..................... d company.
A culture grounded , .....................
3. in ..................... and ..................... norms that match what is
needed for good strategy implementation.
An important part of managing the strategy implementation process is establishing and
nurturing a good 'fit' and ................
between ..................... .....
When implementing a new strategy, a company should take time to
5. assess .....................
Once a strategy is established, it is difficult
6. to .....................
Changing a company's culture to align it is one of the toughest
7. with ..................... management
tasks.
Changing culture requires actions .................
8. both ..................... and .... actions.
Leaders must values through internal company
9. emphasize ..................... communications.
The greater the gap between the cultures of the two firms, the
10. the ..................... executives
in the acquired firm quit their
jobs.
As a strategy manager, what would you do if you find that the culture of your
organisation is in conflict with company's direction and performance targets?
"Organisation does not have a "best" or a "worst" culture". Substantiate.
To be a good manager, one must expertly use symbols, role models, and ceremonial
occasions to achieve the strategy culture fit. Why/why not?
"Integration of culture remains atop challenge in majority of mergers and
acquisitions". Why?
Explain the rationale behind benchmarking with the help of suitable examples.
Do you think that each activity in the value chain can contribute to a firm's relative
cost position and create a basis for differentiation? Why/why not?
Explain the concept of value chain with the help of figure and suitable examples.
Conduct a value chain analysis for a computer system manufacturing company.
"Resources alone can't do any good for a company. " Elucidate
Discuss the organizational resources from a strategic point of view.
-
109
Strategic
Management
Notes Answers: Self Assessment
1. culture 2. mission, strategy
3. values, practices, behavioural 4. culture, strategy
5. strategy-culture compatibility 6. change

symbolic,
7. strategy 8. substantive
9. dominant 10. faster
AA. Thompson and AJ. Strickland, Strategic Management, Business

Books Publications,
Texas, 1984.
Francis Cherunilam, Strategic Management, Himalaya Publishing Home,
Mumbai,
1998.
Johnson Gerry and Sholes Kevan, Exploring Corporate Strategy, 6th
Edition, Pearson
Education Ltd., 2002.
Michael Porter, Competitive Advantage, Free Press, New York.
Online links humanresources.about.com/.../organisationalculture/.../culture

www.isixsigma.com/me/benchmarking
110 -
Unit 7: Corporate Level
Strategies
Unit 7: Corporate Level Note

s
Strategies
CONTENTS
Objectives
Introduction
Expansion Strategies
Retrenchment Strategies
23 Turnaround Strategy
24 Divestment
25 Bankruptcy
26 Liquidation
Combination Strategies
Internationalisation
Cooperation Strategies
23 Joint Ventures
24 Strategic Alliances
25 Consortia
Restructuring
Summary
Keywords
Self Assessment
Review Questions
Further Readings
Objectives

Discuss the expansion strategies: concentration, integration and
diversification
Explain the retrenchment and combination strategies
State the concept of internationalisation
Describe the concept of cooperation and restructuring
-
111
Notes
Introduction
Corporate strategy is primarily about the choice of direction for the corporation as a
whole. The basic purpose of a corporate strategy is to add value to the individual
businesses in it. A corporate strategy involves decisions relating to the choice of
businesses, allocation of resources among different businesses, transferring skills
and capabilities from one set of businesses to others, and managing and nurturing
a portfolio of businesses in such a way as to obtain synergies among product lines
and business units, so that the corporate whole is greater than the sum of its
individual business units. The essence of a corporate strategy vis-a-vis a business-
level strategy is summarized in Figure 7.1.
Figure 7.1
Managers at the corporate level act on behalf of shareholders and provide strategic
guidance to business units. In these circumstances, a key question that arises is to
what extent and how might the corporate level add value to what the businesses
do; or at least how it might avoid destroying value.
Corporate strategy is thus concerned with two basic issues:
What businesses should a firm compete in?
How can these businesses be coordinated and managed so that they create
“Synergy.”
Notes Synergy means that the whole is greater than the sum of its parts. In
organisational terms, synergy means that as separate departments within an
organisation co-operate and interact, they become more productive than if each
were to act in isolation. In strategic management, the corporate parent has to
create synergy among the separate business units by effectively coordinating their
activities, so that the corporate whole is greater than the sum of the independent
units. Synergy is said to exist for a multi-divisional corporation if the return on
investment (ROI) of each division is greater than what the return would be if each
division were an independent business.
According to Goold and Campbell, synergy can take place in one of the six forms:
Shared Know-how: Combined units often benefit from sharing knowledge
and skills. This is also called a leveraging of core competencies.
Contd..
.
112 -
Unit 7: Corporate Level Strategies
2. Coordinated Strategies: Alligning the business strategies of two or more business Notes
units may provide a company with synergy by reducing competition, and developing
a coordinated response to common competitors.
23 Shared Tangible Resources: Combined units can sometimes save
money by sharing resources, such as a common manufacturing facility or
R&D lab.
24 Economies of Scale or Scope: Coordinating the flow of products or
services of one unit with that of another unit can reduce inventory,
increase capacity utilization and improve market access.
25 Pooled Negotiating Power: Combined units can combine their
purchasing to gain bargaining power over common suppliers to reduce
costs and improve quality. The same can be done with common
distributors.
26 New Business Creation: Exchanging knowledge and skills can facilitate
new products or services by combining the separate activities in a new
unit or by establishing joint ventures among internal business units.
Expansion Strategies
Growth strategies are the most widely pursued corporate strategies. Companies
that do business in expanding industries must grow to survive. A company can grow
internally by expanding its operations or it can grow externally through mergers,
acquisitions, joint ventures or strategic alliances.
Reasons for Pursuing Growth Strategies
Firms generally pursue growth strategies for the following reasons:

To obtain economies of scale: Growth helps firms to achieve large-scale
operations, whereby fixed costs can be spread over a large volume of
production.
To attract merit: Talented people prefer to work in firms with growth.
To increase profits: In the long run, growth is necessary for increasing profits of
the organisation, especially in the turbulent and hyper–competitive
environment.
To become a market leader: Growth allows firms to reach leadership positions in
the market. Companies such as Reliance Industries, TISCO etc. reached
commanding heights due to growth strategies.
To fulfill natural urge: A healthy firm normally has a natural urge for growth. Growth
opportunities provide great stimulus to such urge. Further, in a dynamic world
characterized by the growth of many firms around it, a firm would have a natural
urge for growth.
To ensure survival: Sometimes, growth is essential for survival. In some cases, a
firm may not be able to survive unless it has critical minimum level of
business. Further, if a firm does not grow when competitors are growing, it
may undermine its competitiveness.
Categories of Growth Strategies
Growth strategies can be divided into three broad categories:

Intensive Strategies
Integration Strategies
Diversification Strategies
-
113
Notes Concentration Strategies
Without moving outside the organisation’s current range of products or services, it may
be possible to attract customers by intensive advertising, and by realigning the product
and market options available to the organisation. These strategies are generally referred
to as intensification or concentration strategies. By intensifying its efforts, the firm will be
able to increase its sales and market share of the current product-line faster. This is
probably the most successful internal growth strategy for firms whose products or
services are in the final stages of the product life cycle. Most of the approaches of
intensive strategies deal with product-market realignments.
Thus, there are three important intensive strategies:
Market penetration
Market development
Product development
Market penetration: Market penetration seeks to increase market share for existing
products in the existing markets through greater marketing efforts. This includes
activities like increasing the sales force, increasing promotional effort, giving
incentives etc. Market penetration is generally achieved through the following three
major approaches:
23 Increasing sales to the current customers: This can be done through:
Increasing the size of the purchase
Advertising other uses
Giving price incentives for increased use
For example, if customers of toothpaste who brush once a day are
convinced to brush twice a day, the sales of the product to the current
consumers might almost double.
Attracting competitor’s customers: If the firm succeeds in making the
customers to switch from the competitor’s brands to the firm’s brands,
while maintaining its existing customers intact, there will be an increase
in the firm’s sales. This can be done through:
23 Increasing promotional effort
24 Establishing sharper brand differentiation
25 Offering price cuts
Attracting non-users to buy the product: If there are a significant number of
non-users of a product who could be made users of the product, there
will be an opportunity to increase market share. This can be done
through:
23 Inducing trial use through sampling, price incentives etc.
24 Advertising new uses
Notes In India, there is a very large rural market for cosmetics, which can be tapped
through this approach. This strategy will be effective when:
Current markets are not saturated
Usage rate of present customers is low
Economies of scale can bring down the costs
Market shares of major competitors are declining while total sales are increasing
114 -
Market Development: Market development seeks to increase market share by Note

2. selling the s
present products in new markets. This can be achieved through the following
approaches:
(a) By entering new geographic markets: A company, which has been confined to
some part
of a country, may expand to other parts and foreign markets. Thus, market
development can be achieved through:
(i) Regional expansion
(ii) National expansion
(iii) International expansion
Example: Nirma, which was confined to local markets or some parts of the
country in the beginning, later expanded to the regional market and then to the
national market.
By entering new market segments: This can be achieved through:
23 Developing product versions to appeal to other segments
24 Entering other channels of distribution
25 Advertising in other media
Example: Hindustan Lever entered the low price detergent segment by

introducing a low-priced detergent called “Wheel” to compete with “Nirma”. This
strategy will be effective when:
New untapped or unsaturated markets exist

New channels of distribution are available
The firm has excess production capacity
The firm’s industry is becoming rapidly global
The firm has resources for expanded operations
Product Development: Product development seeks to increase the market share
by developing new or improved products for present markets.
This can be achieved through:
23 Developing new product features
24 Developing quality variations
25 Developing additional models and sizes (product proliferation)
Example: Hindustan Lever keeps on adding new brands or improved versions

of consumer products from time to time to maintain its market share. This strategy
will be effective when:
The firm’s products are in maturity stage
The firm witnesses one of the rapid technological developments in the industry
The firm is in a high growth industry
Competitors bring out improved quality products from time to time
The firm has strong R&D capabilities.
-
115
Notes Integrative Strategies
Integration basically means combining activities relating to the present activity of a

firm. Such a combination can be done on the basis of the industry value chain. A
company performs a number of activities to transform an input to output. These
activities include right from the procurement of raw materials to the production of
finished goods and their marketing and distribution to the ultimate consumers.
These activities are also called value chain activities; the value chain activities of an
industry are shown in Figure 7.2. So, a firm that adopts integration may move
forward or backward the industry value chain.
Figure 7.2: Industry Value Chain
Supply of raw materials Manufacturing Distribution and

and components and operations retail network
Expanding the firm’s range of activities backward into the sources of supply and/or
forward into the distribution channels is called “Vertical Integration”. Thus, if a
manufacturer invests in facilities to produce raw materials or component parts that
it formerly purchased from outside suppliers, it remains in the same industry, but its
scope of operations extend to two stages of the industry value chain. Similarly, if a
manufacturer opens a chain of retail outlets to market its products directly to
consumers, it remains in the same industry, but its scope of operations extend from
manufacturing to retailing. Viewed from a broader angle, the firm’s own value chain
activities are often closely linked to the value chain activities of the suppliers and
distributors. Suppliers’ value chain is important because the costs, performance
features and quality of the inputs influence a firm’s own costs and product
differentiation capabilities. Anything the firm does to lower costs or improve quality
of its inputs, will enhance its own competitiveness in the market. Similarly, the costs
and margins paid to distributors and retailers become a part of the price the
consumers pay. Besides, the activities of distributors and retailers affect consumers’
satisfaction.
Vertical integration can be:
Full integration: participating in all stages of the industry value chain.
Partial integration: participating in selected stages of the industry value chain.
A firm can pursue vertical integration by starting its own operations or by acquiring
a company already performing the activities it wants to bring in house. Thus,
integration is basically of two types:
Vertical integration and
Horizontal integration
Vertical Integration
As already explained above, vertical integration involves gaining ownership or

increased control over suppliers or distributors. Vertical integration is of two types:
Backward Integration: Backward integration involves gaining ownership or
increased control of a firm’s suppliers. For example, a manufacturer of finished
products may take over the business of a supplier who manufactures raw
materials, component parts and other inputs. Brooke Bond’s acquisition of tea
plantations is an example of backward integration.
116 -
Backward Integration increases the dependability of the supply and quality of raw materials
Notes used as production inputs. This strategy is generally adopted when:
23 Present suppliers are unreliable, too costly or cannot meet the firm’s needs.
24 The firm’s industry is growing rapidly.
25 The number of suppliers is small, but the number of competitors is large.
26 Stable prices are important to stabilize cost of raw materials.
27 Present suppliers are getting high profit margins.
28 The firm has both capital and human resources to manage the new business.
Forward Integration: Forward integration involves gaining ownership or increased

control over distributors or retailers. For example, textile firms like Reliance,
Bombay Dyeing, JK Mills (Raymond’s) etc. have resorted to forward integration
by opening their own showrooms.
Forward Integration is generally adopted when:
23 The present distributors are expensive, or unreliable or incapable of
meeting the firm’s needs.
24 The availability of quality distributors is limited.
25 The firm’s industry is growing and will continue to grow.
26 The advantages of stable production are high.
27 Present distributors or retailers have high profit margins.
28 The firm has both the capital and human resources needed to manage
the new business.
Advantages of Vertical Integration: The following are the advantages of vertical integration:
A secure supply of raw materials or distribution channels.
Control over raw materials and other inputs required for production or distribution
channels.
Access to new business opportunities and technologies.
Elimination of need to deal with a wide variety of suppliers and distributors.
Risks
Increased costs, expenses and capital requirements.
Loss of flexibility in investments.
Problems associated with unbalanced facilities or unfulfilled demand.
Additional administrative costs associated with managing a more complex set of activities.
!
Caution Sometimes, half-hearted commitment of wholesalers and retailers frustrate
a company’s attempt to boost sales and market share. In such an event, forward
integration is the best strategy.
117
Notes Disadvantages of Vertical Integration: The following are the disadvantages of

vertical integration
It boosts the firm’s capital investment.

It increases business risk.
It denies financial resources to more worthwhile pursuits.
It locks a firm into relying on its own in-house sources of supply.
It poses all kinds of capacity-matching problems.
It calls for radically different skills and capabilities, which may be lacked by the
manufacturer.
Outsourcing of component parts may be cheaper and less complicated than in-
house manufacturing.
Most of the world’s automakers, despite their expertise in automobile technology
and manufacturing, strongly feel that purchasing many of their key parts and
components from manufacturing specialists result in:
Higher quality
Lower costs
Greater design flexibility
So, they feel that vertical integration option is not preferable.
Weighing the Pros and Cons of Vertical Integration: All in all, vertical
integration strategy can have both strengths and weaknesses. The choice depends
on:
Whether vertical integration can enhance the performance of the organisation in
ways that lower costs, build expertise or increase differentiation.
Whether vertical integrations impact on costs, flexibility, response times and
administrative costs of coordinating more activities, are more justified.
Whether vertical integration substantially enhances a company’s competitiveness.
If there are no solid benefits, vertical integration will not be an attractive strategic
option. In many cases, companies prefer to focus on a narrow scope of activities
and rely on outsiders to perform the remaining activities.
In today’s world of close working relationships with suppliers and distributors and
with efficient supply chain management systems, very few firms can make a case
for backward integration just for the purposes of ensuring a reliable supply of raw
materials or components, or to reduce production costs.
Guidelines for Vertical Integration: The guidelines for vertical integration are as
follows:
If the performance of suppliers or distributors is satisfactory, it is not appropriate to
take over these activities.
Highly fluctuating sales or demand for the products of the organisation can either
strain resources (when demand is high) or result in unutilized capacity (when
demand is low). The cycle of “boom and bust” is not conducive to integration.
The strategy of vertical integration may be viable if there is a likelihood of
expansion of capacity in the near future.
118 -
Notes
Task Give examples of vertical integration and assess the validity and feasibility of
those integrations.
Horizontal Integration
Horizontal integration is a strategy of seeking ownership or increased control over a
firm’s competitors. Some authors prefer to call this as horizontal diversification. By
whichever name it is called, this strategy generally involves the acquisition, merger
or takeover of one or more similar firms operating at the same stage of the industry
value chain.
Recent acquisition of Arcelor by Mittal Steels and the acquisition of Corus by Tata
Steel are good examples of horizontal integration.
The most important advantage of horizontal integration is that it generally
eliminates or reduces competition. Other advantages are:
It yields access to new markets.
It provides economies of scale.
It allows transfer of resources and capabilities.
When horizontal integration is appropriate
Horizontal integration is an appropriate strategy when:
A firm competes in a growing industry.
Increased economies of scale provide a major competitive advantage.
A firm has both the capital and human talent needed to successfully manage an
expanded organisation.
Competitors are faltering due to lack of managerial expertise or resources, which
the firm has.
It should be noted that horizontal integration might not be an appropriate strategy
if competitors are doing poorly due to an overall decline in industry sales.
Some increased risks are associated with both types of integration. For horizontally
integrated firms, the risk comes from increased commitment to one type of
business. For vertically integrated firms, the risk comes from shortage of managers
with appropriate skills or expertise to manage the expanded activities. If there is
much more potential profit in downstream or upstream activities, it is better to go in
for vertical integration.
Diversification Strategies
Diversification is the process of adding new businesses to the existing businesses

of the company. In other words, diversification adds new products or markets to the
existing ones. A diversified company is one that has two or more distinct
businesses. The diversification strategy is concerned with achieving a greater
market from a greater range of products in order to maximize profits. From the risk
point of view, companies attempt to spread their risk by diversifying into several
products or industries.
Example: An air-conditioning company may add room-heaters in its present

product lines, or a company producing cameras may branch off into the
manufacturing of copying machines.
-
119
Notes Diversification can be achieved through a variety of ways:

Through mergers and acquisitions.
Through joint ventures and strategic alliances.
Through starting up a new unit (internal development)
Thus, the first concern in diversifying is what new industries to get into and whether
to enter by starting a new business unit or by acquiring a company already in the
industry or by forming a joint venture or strategic alliance with another company. A
company can diversify narrowly into a few industries or broadly into many
industries. The ultimate objective of diversification is to build shareholder value i.e.,
increasing value of the firm’s stock.
Reasons for Diversification: The important reasons for a company diversifying
their business are:
Saturation or decline of the current business: If the company is faced with
diminishing market opportunities and stagnating sales in its principal business,
it may become necessary to enter new businesses to achieve growth.
Better opportunities: Even when the current business provides scope for further
growth, there may be better opportunities in new lines of business. A firm in a
“sunset industry” may be tempted to enter a “sunrise industry.”
Sharing of resources and strengths: Diversification enables companies to
leverage existing competencies and capabilities by expanding into businesses
where these resources become valuable competitive assets. By sharing
production facilities, technological capabilities, managerial expertise,
distribution channels, sales force, financial resources etc., synergy can be
obtained.
New avenues for reducing costs: Diversifying into closely related businesses
opens new avenues for reducing costs.
Technologies and products: By expanding into industries, the company can
obtain new technologies and products, which can complement its present
businesses.
Use of brand name: Through diversification, the company can transfer its
powerful and well-known brand name to the products of other businesses.
Risk minimization: The big risk of a single-business firm is having all its eggs in
one industry basket. If the market is eroded by the appearance of new
technologies, new products or fast–changing consumer preferences, then a
company’s prospects can quickly diminish.
Example: Digital cameras have diminished markets for film and film
processing; CD and DVD technology has replaced cassette tapes and floppy disks
and mobile phones are dominating landline phones. Thus, there are substantial
risks to single-business companies, and diversification into other businesses
minimizes this risk. But diversification itself can become risky.
Risks of Diversification: Diversification has several risks. They are:
There is no guarantee that the firm will succeed in the new business. In fact, many
diversifications have been failures.
If the new lines of business result in huge losses, that adversely affects the main
business of the company.
120 -
3. Diversification may sometimes result in neglect of the old business. Notes
Diversification may invite retaliatory moves by competitors, which may adversely

affect even the old businesses.
Types of Diversification: Broadly, there are two types of diversification:
Concentric diversification.
Conglomerate diversification.
Concentric Diversification: Adding a new, but related business is called
concentric diversification. It involves acquisition of businesses that are related
to the acquiring firm in terms of technology, markets or products. The selected
new business has compatibility with the firm’s current business.
The ideal concentric diversification occurs when the combined profits increase
the strengths and opportunities and decrease the weaknesses and threats.
Thus, the acquiring firm searches for new businesses whose products,
markets, distribution channels and technologies are similar to its own, and
whose acquisition results in “Synergy’’. This is possible with related
diversification because companies strive to enter product markets that share
resources and capabilities with their existing business units.
Diversification must create value for shareholders. But this is not always the
case. Acquiring firms typically pay premiums when they acquire a target firm.
Besides, the risks and uncertainties are high. Why do firms still go in for
diversification? The answer, in one word, is “Synergy”.
In related diversification, synergy comes from businesses sharing tangible and
intangible resources. Additionally, firms can enhance their ‘market power’
through pooled negotiating power. There are other advantages of concentric
diversification.
Advantages
23 Increases the firm’s stock value.

24 Increases the growth rate of the firm.
25 Better use of funds than ploughing them back into internal growth.
26 Improves the stability of earnings and sales.
27 Balances the product line when the life cycle of the current products has peaked.
28 Helps to acquire a needed resource quickly (e.g. technology or innovative
management etc.)
29 Achieves tax savings.
30 Increases efficiency and profitability through synergy.
31 Reduces risk.
Conglomerate diversification: Adding a new, but unrelated business is called
conglomerate diversification. The new business will have no relationship to the
company’s technology, products or markets. For example, ITC which is
basically a cigarette manufacturer, has diversified into hotels, edible oils,
financial services etc. Similarly, Reliance Industries, which is basically a textile
manufacturer, has diversified into petro chemicals, telecommunications,
retailing etc.
Unlike concentric diversification, conglomerate diversification does not result
in much of synergy. The main objective is profit motive. But it has important
advantages.
-
121
Notes Advantages
Business risk is scattered over diverse industries.
Financial resources are invested in industries that offer the best profit
prospects.
Buying distressed businesses at a low price can enhance shareholder wealth.
Company profitability can be more stable in economic upswings and
downswings.
Disadvantages
It is difficult to manage different businesses effectively.
The new business may not provide any competitive advantage if it has no
strategic-fits
The differences between concentric and conglomerate diversification are
summarized below:
Table 7.1: Differences between Concentric and Conglomerate

Diversifications
Conglomerate
Sl. No Concentric Diversification Diversification
The company diversifies into The company diversifies into
1. businesses businesses
that are unrelated to the existing
related to the existing businesses. businesses.
There is commonality in No commonality in markets, products
2. markets, or
products or technology. technology.
The main objective is to
3. increase The main objective is to increase
shareholder value through
“synergy”, shareholder value through profit
which is achieved through sharing maximizatio
of n.
skills, resources and capabilities.
4. Less risky. More risky.
Caselet Diversification brings Success for ITC
F or ITC
relatively new Ltd., 2007-08
segment continuedfast-moving
of non-cigarettes to be year of quiet growth.
consumer Just
goods, andmore
solidlaunches in its
growth. As
the past few years, ITC's non-cigarettes businesses continued to grow at a scorching pace,
accounting for a bigger share of overall revenues. "The non-cigarette
in
portfolio grew by 37.6% during 2006-07 and accounted during that year for 52.3%
of the company's net turnover," an ITC spokesman said. In fact, over the first three
quarters of 2007-08, ITC's non-cigarette FMCG businesses have grown by 48% on
the same period last year, "Indicating that its plans for increasing market share
and standing are succeeding".
The branded packaged foods business continued to expand rapidly, with the
focus on snacks range Bingo. The biscuit category continued its growth
momentum with the 'Sunfeast' range of biscuits launching 'Coconut' and 'Nice'
variants and the addition of 'Sunfeast BenneVita Flaxseed' biscuits.
Aashirvaad atta and kitchen ingredients retained their top slots at the national
level, with the spices category adding an organic range. In the confectionery
category, which grew by 38% in the third quarter, ITC cited AC Nielsen data to
claim market leader status in throat lozenges. Instant mixes and pasta
powered the sales of its ready-to-eat foods under the Kitchens of India and
Aashirvaad brands.
In Lifestyle apparel, ITC launched Miss Players' fashion wear for young women
to complement its range for men.
Contd...
122 -
Overall, the biscuit category grew by 58% during the last quarter, ready-to-eat Note
foods s
under the Kitchens of India and Aashirvaad brands by 63%, and the lifestyle
business by
26%.
For the industry, the most significant initiative to watch was ITC's foray into
premium
personal care products with its Fiama Di Wills range of shampoos, conditioners,
shower
gels, and soaps. In the popular segment, ITC has launched a range of soaps and
shampoos
under the brand name Superia.
Ravi Naware, chief executive of ITC's foods business, was quoted recently as
saying that
the business will make a positive contribution to ITC's bottomline in the next two
to three
years.
In hotels, ITC's Fortune Park brand was making the news during the year, with a
rapid
rollout of first class business hotels.
In the agri-business segment, the e-choupal network is trying out a pilot in
retailing fresh
fruits and vegetables. The e-choupals have already specialised in feeding ITC
high quality
wheat and potato, among other commodities, grown by farmers with help from
the
e-choupal.
Source: Financial Express, Article by Somnath Dasgupta

Diversification into both Related and Unrelated Businesses: Some
companies may diversify
into both related and unrelated businesses. The actual practice varies from company
to company.
There are three types of enterprises in this respect:
Dominant business enterprises: In such enterprises, one major “core” business
accounts for 50 to 80 per cent of total revenues and the remaining comes
from small related and unrelated businesses, e.g. TISCO.
Narrowly diversified enterprise: These are enterprises that are diversified
around a few (two to five) related or unrelated businesses e.g. BPL.
Broadly diversified enterprises: These enterprises are diversified around a
wide-ranging collection of related and unrelated businesses e.g. ITC, Reliance
Industries.
Means to Achieve Integration or Diversification: Profitable growth is one of
the prime objectives of any business firm. Growth can be achieved internally or
externally. Internal growth in assets, sales and profits takes place when the firm
introduces a new product or increases the capacity for the existing products through
setting up a new plant. Increasing the capacities through internal growth takes time
and involves lot of risk. Alternatively, business firms can suddenly increase their
growth rate by acquisitions, mergers, etc. These strategies are often referred to as
cooperation strategies.
As already mentioned, growth especially by way of integration or diversification can
be achieved through four basic means:
Mergers and acquisitions
Joint ventures
Strategic alliances
Internal development
With the opening up of the Indian economy, business firms have the freedom to
expand, diversify and modernize the operations and set up new undertakings.
Market forces continue to play the role and experienced entrepreneurs always
remain in search of opportunities to take over units and to expand their operations.
So the free economic environment plays a very important role in accelerating the
merger and acquisition activities.
123
Notes
Task Give examples of companies that have recently opted for diversification into
unrelated businesses. Can you find out the reasons behind their diversification?
7.2 Retrenchment Strategies
They are the last resort strategies. A company may pursue retrenchment strategies
when it has a weak competitive position in some or all of its product lines resulting
in poor performance – sales are down and profits are dwindling. In an attempt to
eliminate the weaknesses that are dragging the company down, management may
follow one or more of the following retrenchment strategies.
Turnaround
Divestment
Bankruptcy
Liquidation
7.2.1 Turnaround Strategy
A firm is said to be sick when it faces a severe cash crunch or a consistent

downtrend in its operating profits. Such firms become insolvent unless appropriate
internal and external actions are taken to change the financial picture of the firm.
This process of recovery is called “turnaround strategy”.
Any successful turnaround strategy consists of three inter-related phases:
The first phase is the diagnosis of impending trouble. Many authors and research
studies have indicated distinct early warning signals of corporate sickness.
The second phase involves analyzing the causes of sickness to restore the firm on
its profit track. These measures are of both short-term and long-term nature.
The third and final phase involves implementation of change process and its
monitoring.
When Turnaround becomes Necessary
Do companies turn sick overnight and qualify as potential candidates for turnaround
or do they become sick slowly which can be stopped by timely corrective action?
Obviously, the latter is true in most of the cases. But the reality is also that
companies becoming sick often do not themselves recognize this fact, and fail to
take timely action to remedy the situation.
Despite the fact that factors that lead to sickness may vary from company to
company, there are some common signals which herald the onset of sickness. John
M Harris has listed a dozen danger signals of impending sickness.
Decreasing market share: This is the most significant symptom of a major
sickness. A company which is losing its market share to competition needs to
sit up and take careful note. Regular monitoring of market share helps
companies to keep a tag on their performance in the market vis-à-vis their
competitors. Any indication of declining market share should trigger off
immediate corrective action.
124 -
2. Decreasing constant rupee sales: Sales figures, to be meaningful, should be adjusted for
Notes inflation. If constant rupee sales figures are showing a declining trend, then this is a
danger signal to watch out.
Decreasing profitability: Profit figures are a good indication of a company’s
health. Care must be taken to interpret the profit figures correctly, so as to
avoid any misjudgments. Decreasing profitability can show up as smaller
profits in absolute terms or lower profits per rupee of sales or decreasing
return on investment or smaller profit margins.
Increasing dependence on debt: A company overly reliant on debt soon gets
into a tight corner with very few options left. A substantial rise in the amount
of debt, a lopsided debt-to-equity ratio and a lowered corporate credit rating
may cause banks and other financial institutions to impose restrictions and
become reluctant to lend money. Once financial institutions are hesitant to
lend money, the company’s rating on the stock market also slides down and it
becomes very difficult for the company to raise funds from the public too.
Restricted dividend policies: Dividends frequently missed or restricted dividends
signal danger. Often, such companies may have earlier paid substantially
higher proportion of earnings as dividends when in fact they should have been
reinvesting in the business. Current inability to pay dividends is an indication
of the gravity of the situation.
Failure to reinvest sufficiently in the business: For a company to stay
competitive and keep on the fast growth track, it is essential to reinvest
adequate amounts in plant, equipment and maintenance. When a business is
growing, the combination of new investments and reinvestments often
warrants borrowing. Companies which fail to recognize this fact and try to
finance growth with only their internal funds are applying brakes in the path of
growth.
Diversification at the expense of the core business: It is a well-observed fact
that once companies reach a particular level of maturity in the existing
business, they start looking for diversification. Often this is done at the cost of
the core business, which then starts to deteriorate and decline. Diversification
in new ventures should be sought as a supplement and not as a substitute for
the primary core business.
Lack of planning: In many companies, particularly those built by individual
entrepreneurs, the concept of planning is generally lacking. This can often
result in major setbacks as limited thought or planning go into the actions and
their consequences.
Inflexible chief executives: A chief executive who is unwilling to listen to fresh
ideas from others is a signal of impending bad news. Even if the CEO
recognises the danger signals, his unwillingness to accept any proposal from
his subordinates further blocks the path towards recovery.
Management succession problems: When nearly all the top managers are in
their mid-fifties, there may be a serious vacuum at the second line of
command. As these older managers retire or leave because of perception of
decreasing opportunities, there is bound to be serious management crisis.
Unquestioning boards of directors: Directors, who have family, social or
business ties with the chief executive or have served very long on the board,
may no longer be objective in their judgment. Thus, these directors serve
limited purpose in terms of questioning or cautioning the CEO about his
actions.
A management team unwilling to learn from its competitors: Companies in
decline often adopt a closed attitude and are not willing to learn anything from
their competitors. Companies which have survived tough competitive times
continuously analyse their competitors’ moves.
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125
Notes Types of Turnaround Strategies
Slater has classified the turnaround strategies into two broad categories. These are
strategic turnaround and operating turnaround. Whether a sick business needs
strategic or operating turn-around can be ascertained by analysing the current
strategic and operating health of the business. The operating turnarounds are
easier to carry out and can be applied only when there are average to strong
strategic strengths (product-market relationship) in the business.
The strategic turnaround choices may involve either a new way to compete existing
business or entering an altogether new business. Entering a new business as a
turnaround strategy can be approached through the process of product portfolio
management. The strategic turnaround focuses either on increasing the market
share in a given product-market framework or by shifting the product-market
relationship in a new direction by re-positioning.
The operating turnaround strategies are of four types. These are:
Revenue-increasing strategies
Cost-cutting strategies
Asset-reduction strategies
Combination strategies
The focus of all these choices is on short-term profit. Thus, if a sick firm is operating
much below its break-even, it must take steps to reduce the levels of fixed cost and
help in reducing the total costs of the firm. In real life, it is always a difficult choice
to identify the assets which can be sold without affecting the productivity of the
business. To identify saleable assets, the firm may have to keep in mind its strategic
move in the next two to three years. The turnaround strategies appropriate under
different circumstances are:
If the sick firm is operating substantially but not extremely below its break-even
point, then the most appropriate turnaround strategy is the one which generates
extra revenues. These may be in the form of price reduction to increase sales,
stimulating product demand through promotional efforts or sometimes by
introducing scaled down versions of the main products of the firm. The increased
quantities of product sales not only result in higher sales but also reduce the per
unit cost, thus leading to higher operating profits.
If the firm is operating closer but below break-even point then the turnaround
strategy calls for application of combination strategies. Under combination
strategies cost-reducing, revenue generating and asset-reduction actions are
pursued simultaneously in an integrated and balanced manner. The combination
strategies have a direct favourable impact on cash flows as well as on profits.
If the firm is operating around break-even point, it usually needs cost-reduction
strategies, since cost-reduction actions are easily carried out as compared to
revenue generating actions, the former is usually preferred for quick short-term
profit increases.
Slater has, however, linked the choice of turnaround strategies to the causes of
decline. The recommended choice of strategies includes change in management
and organisational processes, improved financial controls, growth via acquisition
and new financial strategies.
Closely associated to the choice of turnaround strategy is the concept of turnaround
process. We will focus on this aspect in the next section.
Turnaround Process
The process of turning a sick company into a profitable one is rather complex and
difficult. It is complex because a successful turnaround strategy demands corrective
actions in many deficient areas of the firm. It is necessary that all these actions are
integrated and do not contradict each other.
126 -
The turnaround process is difficult because it involves perceptual and attitudinal changes Note
at all s
levels as far as employees are concerned. These human change processes tend to
become very
sensitive when the firm is in a crisis situation. Therefore, many a time, a change in the
leadership
or even an active intervention from outside is suggested for bringing about such changes
in the
organisation.
As soon as the parameters of corporate performance are indicative of unsatisfactory
corporate
performance, it becomes necessary to immediately tighten the controls within the
organisation.
Effective controls have a positive impact on cost-reduction, that is, profit improvement
and also
on the net cash-flows of the firm. But this tightening of the financial and administrative
control
do not guarantee a stable turnaround process. In fact, controls coupled with poor quality
image
of the product may hasten the process of corporate failure. So while the controls are
being
effected, it is necessary that the strategic posture of the company may also be
overhauled. This
involves major changes in the product-mix, customer-mix and the pattern of resources
deployment in the company. These two stages of change further need to be
complemented by
changes in top management and many organisational processes. If these changes
produce early
results which are satisfactory, then for long-term effects it is necessary to reinforce these
changes.
Prahlad and Thomas have presented ten propositions for turning around sick units. These
propositions are:
Revival of a sick unit requires the formulation and implementation of a new strategy.
Localising problems and sequencing the corrective actions helps in the revival of
the sick unit.
The successful implementation of the turnaround strategy requires appropriate
organisation structure, a participative type of decision making environment,
effective administrative and budgetary controls, training, performance
evaluation, career progression and rewards.
The turnaround strategy must focus on profit generation and profits must be
regarded as a legitimate goal.
The acceptance and the commitment of managers and employees of the
organisation towards revival measures must be high if not total. Openness in
management processes helps in gaining commitment and thus facilitates the
implementation process.
Openness in the change process leads to confidence in the top management and its strategy.
Understanding of technical processes and problem-solving attitude in overcoming
technical snags is essential for turning around sick companies.
Consultants can play a vital role in objective analysis of problems as well as in
implementing innovative changes.
The active support given to the chief executive by the appointing authorities is
critical for the implementation of turnaround strategy.
Leadership provides the focus for action in sick units.
Thus, from these propositions, it is evident that in any turnaround process, the
important issues are strategy, the management process, the technical competence
and the leadership.
7.2.2 Divestment
Selling a division or part of an organisation is called divestiture. This strategy is

often used to raise capital for further strategic acquisitions or investments.
Divestiture is generally used as a
127
part of turnaround strategy to get rid of businesses that are unprofitable, that
Notes require too much
capital or that do not fit well with the firm's other activities.
Divestiture is an appropriate strategy to be pursued under the following
circumstances:
1. When a business cannot be turned around
2. When a business needs more resources than the company can provide
3. When a business is responsible for a firm's overall poor performance
4. When a business is a misfit with the rest of the organisation
5. When a large amount of cash is required quickly
6. When government's legal actions threaten the existence of a business.
Reasons for Divestitures

Poor fit of a division: When the parent company feels that a particular
1. division within the
company cannot be managed profitably, it may think of selling the division to
another
company. This does not mean the division itself is unprofitable. The other firm
with
greater expertise in the line of business could manage the division more
profitably. This
means the division can be managed better by someone else than the selling
company.
Reverse synergy: Synergy refers to additional gains that can be derived
2. when two firms
combine. When synergy exists, the combined entity is worth more than the
sum of the
parts valued separately. In other words, 2 + 2 = 5. Reverse synergy exists
when the parts
are worth more separately than they are within the parent company's
corporate structure.
In other words, 2 + 2 = 3. In such a case, an outside bidder might be able to
pay more for a
division than what the division is worth to the parent company.
Poor performance: Companies may want to divest divisions when they are
3. not sufficiently
profitable. The division may earn a rate of return, which is less than the cost of
capital of
the parent company. A division may turn out to be unprofitable due to various
reasons
such as increase in the material and labour cost, decline in the demand etc.
Capital market factors: A divestiture may also take place because the post
4. divestiture
firm, as well as the divested division, has greater access to capital markets.
The combined
capital structure may not help the company to attract the capital from the
investors. Some
investors are looking at steel companies and others may be looking for cement
companies.
These two groups of investors are not interested in investing in combined
company, with
cement and steel businesses due to the cyclical nature of businesses. So each
group of
investors are interested in stand-alone cement or steel companies. So
divestitures may
provide greater access to capital markets for the two firms as separate
companies rather
than the combined corporation.
Cash flow factors: Selling a division results in immediate cash inflows. The
5. companies
that are under financial distress or in insolvency may be forced to sell
profitable and
valuable divisions to tide over the crisis.
To release the managerial talent: Sometime the management may be
6. overburdened with
the management of the conglomerate leading to inefficiency. So they sell one
or more
divisions of the company. After the divestiture, the existing management can
concentrate
on the remaining businesses and can conduct the business more efficiently.
To correct the mistakes committed in investment decisions: Many
7. companies in India
diversified into unrelated areas during the pre-liberalization period. Afterwards
they
realised that such a diversification into unrelated areas was a big mistake. To
correct the mistake committed earlier, they had to go for divestiture. This is
because they moved into product market areas with which they had less
familiarity than their existing activities.
128 -
8. To realise profit from the sale of profitable divisions: This type of divestiture occurs when Notes
a firm acquires under-performing businesses, makes it profitable and then
sells it to other companies. The parent company may repeat this process to
make profit out of it.
To reduce the debt burden: Many companies sell their assets or divisions to
reduce their debt and bring the balance in the capital structure of the firm.
To help to finance new acquisitions: Companies may sell less profitable divisions
and buy more profitable divisions in order to increase the profitability of the
company as a whole.
Types of Divestitures
Spin-off: It is a kind of demerger when an existing parent company distributes on

a pro-rata basis the shares of the new company to the shareholders of the
parent company free of cost. There is no money transaction, subsidiary's
assets are not revalued, and transaction is treated as stock dividend. Both the
companies exist and carry on their businesses independently after spin-off.
During spin-off, a new company comes into existence. The shareholders of the
parent company become the shareholders of the new company spun-off.
The motivations for a spin-off are similar to that of divestitures.
23 Involuntary Spin-off: When faced with an adverse regulatory ruling, a
firm may be forced to spin-off to comply with the legal formalities.
24 Defensive Spin-off: Defensive spin-off is a takeover defence. Company
may choose to spin-off divisions to make it less attractive to the bidder.
25 Tax consequences of Spin-off: Shares allotted to the shareholders during
spin-off is not taxed as capital gain or as dividend.
Example: ITC has spun-off hotel business from the company and formed ITC Hotels Ltd.
Sell-off: It is a form of restructuring, where a firm sells a division to another
company. When the business unit is sold, payment is received generally in the
form of cash or securities.
When the firm decides to sell a poorly performing division, this asset goes to
another owner, who presumably values it more highly because he can use the
asset more advantageously than the seller. The seller receives cash in the
place of asset. So the firm can use this cash more efficiently than it was
utilising the asset that was sold. The firm can also get premium for the assets
because the buyer can more advantageously use such assets.
Sell-off generally have positive impact on the market price of shares of both the
buyer and seller companies. So sell-offs are beneficial for the shareholders of both
the companies.
Voluntary corporate liquidation or bust-ups: It is also known as complete sell-
off. The companies normally go for voluntary liquidation because they create
value to the shareholders. The firm may have a higher value in liquidation
than the current market value. Here the firm sells its assets/divisions to
multiple parties which may result in a higher value being realised than if they
had to be sold as a whole. Through a series of spin-offs or sell-offs a company
may go ultimately for liquidation.
Equity carveouts: It is a different type of divestiture and different form of spin-off
and sell-off. It resembles Initial Public Offering (IPO) of some portion of equity
stock of a wholly owned subsidiary by the parent company.
-
129
The parent company may sell a 100% interest in subsidiary company or it may
Notes choose to
remain in the subsidiary's line of business by selling only a partial interest
(shares) and
keeping the remaining percentage of ownership. After the sale of shares to the
public, the
subsidiary company's shares will be listed and traded separately in the capital
market.
The parent company receives cash from the sale of shares of the subsidiary
company. The
parent company may still control the company by holding controlling interest
in the
subsidiary.
Many firms look to equity carveouts as a means of reducing their exposure to a
riskier line
of business. They also help to raise funds for the parent company.
Notes Spin-offs vs. Equity Carveouts

The following are the differences between the spin-offs and equity carveouts:
In case of spin-off, there is no new set of shareholders. The same shareholders
in the parent company become shareholders in the spun-off company.
In case of equity carveouts, there will be new shareholders as shares are
sold to the public.
In case of spin-off, there is no cash inflow to the parent company. The
shareholders of the parent company are allotted free shares in the new
company.
In case of equity carveouts, as the shares of the subsidiary company are
sold to the public, this results in cash inflow to the parent company.
In case of spin-off, there is a formation of a new company.
In case of equity carveouts, there is no new company that comes into
existence. Here the shares of a subsidiary company are now offered to the
public for sale.
Leveraged buyouts (LBO's): A leveraged buyout is an acquisition of a company
in which the acquisition is substantially financed through debt. Debt typically
forms 70-90% of the purchase price. Much of the debt may be secured by the
assets of the company (asset based lending). Firms with assets that have a
high collateral value can more easily obtain such loans. So LBOs are generally
found in capital intensive industries. Debt is obtained on the basis of
company's future earnings potential.
In LBOs, a buyer generally looks for a company with high growth rate and good
market share. The company should be profitable and the demand for the
product should be known and stable, so that the earnings can be forecasted.
The company should have low debt and its liquidity position should be very
good. Low operating risk of such companies allows the acquisition with high
degree of financial leverage and risk.
The lender is prepared to lend even if the company is highly leveraged
because he has full confidence in the abilities of buyer to fully utilise the
potential of the business and convert it into an enormous value. He also
charges high rate of interest for the loan as it involves high risk.
Bankruptcy
This is a form of defensive strategy. It allows organisations to file a petition in the

court for legal protection to the firm, in case the firm is not in a position to pay its
debts. The court decides the claims on the company and settles the corporation's
obligations.
130 -
Notes
7.2.4 Liquidation
Liquidation occurs when an entire company is dissolved and its assets are sold. It is
a strategy of the last resort. When there are no buyers for a business which wants
to be sold, the company may be wound up and its assets may be sold to satisfy
debt obligations.
Liquidation becomes the inevitable strategy under the following circumstances:
When an organisation has pursued both turnaround strategy and divestiture
strategy, but failed.
When an organisation's only alternative is bankruptcy. A company can legally
declare bankruptcy first and then wind up the company to raise needed funds
to pay debts.
When the shareholders of a company can minimize their losses by selling the
assets of a business.
Case Study
Tracking the Turnaround of Indian Railways
It's attention
a turnaround story that
of premier has business
global not only schools
amazed like
management experts
Harvard and but also
Wharton - thecaught
return to profitability for the 154-year-old Indian Railways, among the world's
the
dramatic
largest railroad networks.
In February, when Railway Minister Lalu Prasad presented India's railway
budget for the 2007-08 fiscal, its most striking aspect was the 215 billions
($4.5 billions) surplus he announced for the organisation that employs 1.5
millions people and boasts a 63,332-kilometer network that ferries 14 millions
passengers daily in 9,000 trains (4,000 more for cargo) from 6,947 stations.
"The railways are poised to create history," exulted Lalu Prasad, one of India's
most colourful politicians, during his 116-minute speech, referring to the
highest-ever surplus - akin to profits for companies - which the Indian Railways
was projected to post for the fiscal year ended March 31.
"This is the same railway that defaulted on the payment of dividend and
whose fund balances had dipped to 3.59 billions ($80 millions) in 2001," said
the minister to the amazement of industry honchos and experts who were
listening attentively to the speech.
In fact, he not only said that the surplus would increase next fiscal but also
belied speculation over freight and upper class fare hikes that had once been a
regular feature for the railways to bridge deficits. In fact, he even announced
an across-the-board cut in tariffs and rolled out plans for 40 new trains,
extended the run of 23 and increased the frequencies of 14 others.
All this only left experts gasping. They wondered what had caused such a sharp
turnaround in the organisation from being the backbone of the Indian economy to
being termed a "white elephant" headed towards bankruptcy by a government-
appointed expert group.
"Today Indian Railways is on the verge of a financial crisis. To put it bluntly, the
'business as usual, low growth' will rapidly drive it to fatal bankruptcy, and in
16 years, the Government of India will be saddled with additional financial
liability," said the report presented in July 2001.
Contd...
-
131
This was, indeed, alarming for the Indian Railways, which since the
Notes commencement of its
first journey on April 16, 1853, has come to reflect the pluralistic character of the
country
with many unique features such as having the world's largest as well as the
smallest
stations, the oldest running locomotive and a separate budget since 1924.
But from 2005, the signs of change were visible and became well entrenched by
2007.
"The railways' renaissance has been engineered by simple entrepreneurial
practices, which
have evoked the admiration of internationally renowned institutions and
companies
alike," said a report by KPMG, which also conducted an international conference
on railways
in New Delhi last month.
"The railways are now working like a private sector corporation. This is great
news for
India. We wish other public services, especially in the social sector, like education
and
health would follow suit," Habil Khorakiwala, president of an apex industry group,
the
Federation of Indian Chambers of Commerce and Industry (FICCI), said.
"The turnaround is not hype because the net revenues have increased sharply,"
said Prof.
G. Raghuram, who has thoroughly examined the performance of the Indian
Railways as a
case study for the premier Indian Institute of Management at Ahmedabad, one of
India's
best-known business schools.
"By increasing the axle-loading of wagons (which increases freight traffic) and,
combining
it with a market-oriented approach, Lalu Prasad has contributed to the success of
Indian
Railways," Raghuram added.
Lalu Prasad attributed the transformation almost entirely to improved efficiency
that was
even able to withstand increased competition from budget carriers that were
offering to
fly passengers for the cost of a second-class air-conditioned fare of the railways.
"Over the past 30 months, freight volumes have grown by 10 percent. Similarly,
growth in
passenger volumes has been doubled," he explained to a group of 130 students
from
Harvard and Wharton a few months ago, while delivering a lecture on the
transformation
of Indian Railways.
"On the supply side, increase in load coupled with reduction in turnaround time of
wagons
from seven to five days has contributed to an incremental loading capacity," the
minister
said in the rather simplistic explanation.
With financial parameters back on track, the Indian Railways now has set itself
ambitious
targets in areas such as refurbishment of stations, passenger amenities, better
coaches and
new freight corridors as it approaches the 11th Five Year Plan that begins April 1.
And says KPMG: "Indian Railways is in a dynamic phase of growth with new
initiatives
planned to capitalise on the existing gains and moving steadier and closer to the
larger
objective of offering world-class services in both freight and passenger
transportation."
Questions
1. Do you think that railways desperately needed a change? Why?
2. What factors were responsible for its turnaround?
Source: http://indiainteracts.in/columnist/2007/07/21/Tracking-the-Indian-Railways-turnaround
saga/
132 -
Notes
7.3 Combination Strategies
A company can pursue a combination of two or more corporate strategies
simultaneously. But a combination strategy can be exceptionally risky if carried too
far. No organisation can afford to pursue all the strategies that might benefit the
firm. Difficult decisions must be made. Priorities must be established. Organisations
like individuals have limited resources, so organisations must choose among
alternative strategies.
In large diversified companies, a combination strategy is commonly employed
when different divisions pursue different strategies. Also, organisations struggling
to survive may employ a combination of several defensive strategies.
7.4 Internationalisation
When the focus of a business is its domestic operations, but a portion of its
activities are outside the home country, it is called an "International Company". In
other words, an international company is one that is primarily based in a single
country but that acquires some meaningful share of its resources or revenues from
other countries. For example, a small company engaged in exporting some of its
products beyond its home country, is called "international" in its operations.
Internationalisation involves creating an international division and exporting the
products through that division. The firm really focuses on the domestic market, and
exports what is demanded abroad. All control is retained at home office regarding
product and marketing strategies. As a firm becomes more successful abroad, it
might set up manufacturing and marketing facilities in the foreign country, and
allow a certain degree of customization. Country units are allowed to make some
minor adaptations to products to suit local needs. But they have far less
independence and autonomy compared to multi-domestic companies. All sources of
core competencies are centralized.
The majority of large US multinationals pursued the international strategy in the
decades following World War II. These companies centralized R&D and product
development but established manufacturing facilities as well as marketing divisions
abroad. Companies such as Mc Donald's and Kellogg's are examples of firms that
followed such a strategy in the beginning. Although these companies do make
some local adaptations, they are of a very limited nature. With increasing pressure
to reduce costs due to global competition, especially from low-cost countries, the
use of this strategy has become limited.
The disadvantages of this strategy are:
By concentrating most of its activities in one location, it fails to take advantage of
the benefit of an optimally distributed value chain.
It is susceptible to higher levels of currency risks, because the company is too
closely associated with a single country and increase in the value of currency
may suddenly make the product unattractive abroad.
Exporting
This means selling the products in other countries through an agent or a distributor.
This choice offers avenues for larger firms to begin their international expansion
with a minimum investment. There are merits and demerits.
-
133
Notes Merits
Less expensive
No need to set up manufacturing facilities abroad
Demerits
Not suitable for bulky, perishable or fragile goods
Import duties make the product expensive
High transportation costs
Cannot avail lower production costs in host country
7.5 Cooperation Strategies
Cooperative strategies such as strategic alliance and joint ventures are a logical
and timely response to intense and rapid changes in economic activity, technology
and globalisation. Apart from alliances between the firms operating within the same
country, cross border alliances have also become increasingly popular these days.
Alliances generally come in three basic types-joint ventures, strategic alliance, and
consortia.
Joint Ventures
In a joint venture, two firms contribute equity to form a new venture, typically in the
host country to develop new products or build a manufacturing facility or set up a
sales and distribution network (Eg. Maruti Suzuki). The commonly cited advantages
are:
Improvement of efficiency
Access to knowledge
Dealing with political risk factors
Collusions may restrict competition
Merits
Two partners bring complementary expertise to the new venture
Both parties share capital and risks.
Helps to meet host country regulations
Demerits
Two partners may fail to get along
The firm has to share profits with the partner
Host country culture may pose problems
7.5.2 Strategic Alliances
This is a collaborative partnership between two or more firms to pursue a common

goal. Each partner in an alliance brings knowledge or resources to the partnership.
Such an alliance is generally formed to access a critical capability not possessed in-
house.
Example: Boeing and Airbus formed a strategic alliance to develop a bigger

aircraft.
Merits and demerits are same as joint ventures, which are also a form of strategic
alliance.
134 -
7.5.3 Consortia Notes
Consortia are defined as large interlocking relationships, cross holdings and equity
stakes between businesses of an industry. There could be two forms of consortia:
Multipartner Consortia: These are multi-partner alliances intended to share an
underlying technology. One of the most important European based
consortiums to date is Air Bus Industries. Airbus brings together four European
aerospace firms from Britain, France, Germany and Spain
Cross-holding Consortia: These include large Japanese Keiretsus (Sumitomo,
Mitsubishi, and Mitsui) and Korean Chaebols (Daewoo, LG, Hyundai, and
Samsung). Two important features of cross-holding consortia are building long-
term focus and gaining technological critical mass among affiliated member
companies.
7.6 Restructuring
Restructuring is another means by which the corporate office can add substantial value
to a business. Here, the corporate office tries to find either poorly performing business
units with unrealized potential or businesses on the threshold of significant, positive
change. The parent intervenes, often selling off the whole or part of the businesses,
changing the management, reducing payroll and unnecessary expenses, changing
strategies, and infusing the business with new technologies, processes, reward systems,
and so forth. When the restructuring is complete, the company can either "sell high" and
capture the added value or keep the business in the corporate family and enjoy the
financial and competitive benefits of the enhanced performance.
For the restructuring strategy to work, the corporate office must have insights to
detect businesses competing in industries with a high potential for transformation.
Additionally, of course, they must have the requisite skills and resources to turn the
businesses around, even if they may be in new and unfamiliar industries.
Restructuring can involve changes in assets, capital structure or management.
Assets restructuring involves the sale of unproductive assets, or even whole lines
of businesses, that are peripheral. In some cases, it may even involve
acquisitions that strengthen the core businesses.
Capital restructuring involves changing the debt-equity mix or the mix between
different classes of debt or equity.
Management restructuring involves changes in the composition of top
management team, organisational structure, and reporting relationships. Tight
financial control, rewards based strictly on meeting performance goals,
reduction in the number of middle-level managers are common steps in
management restructuring. In some cases, parental restructuring may even
result in changes in strategy as well as infusion of new technologies and
processes.
7.7 Summary
Strategy is the direction and scope of an organisation over the long-term.

Strategies achieve advantages for the organisation through its configuration
of resources within a challenging environment, to meet the needs of markets
and to fulfil stakeholder expectations.
Strategies exist at several levels in any organisation – ranging from the overall
business through to individuals working in it.
-
135
Notes Growth strategies are the most widely pursued corporate strategies.
Without moving outside the organisation's current range of products or

services, it may be possible to attract customers by intensive advertising, and
by realigning the product and market options available to the organisation.
These strategies are generally referred to as intensification or concentration
strategies.
There are three important intensive strategies, viz. Market penetration, Market
development and Product development.
Integration basically means combining activities relating to the present activity
of a firm.
Integration is basically of two types, viz. vertical integration and horizontal
integration.
Diversification is the process of adding new businesses to the existing
businesses of the company.
A company may pursue defense strategies when it has a weak competitive
position in some or all of its product lines resulting in poor performance.
Retrenchment strategies are last resort strategies. Companies can use any of
the four retrenchment strategies- turnaround, divestment, bankruptcy and
liquidation.
Firms can take the international route by exporting a part of their produce to
other nations or by outsourcing a small chunk of their work outside.
Cooperative strategies such as strategic alliance and joint ventures are a logical
and timely response to intense and rapid changes in economic activity, technology
and globalisation.
Restructuring is another means by which the corporate office can add
substantial value to a business. Restructuring can involve changes in assets,
capital structure or management.
7.8 Keywords
Backward Integration: Gaining ownership or increased control of a firm's

suppliers.
Corporate Strategy: primarily about the choice of direction for the corporation as
a whole
Diversification: process of adding new businesses to the existing businesses of
the company
Horizontal Integration: The strategy of seeking ownership or increased control
over a firm's competitors.
Integration: Integration basically means combining activities relating to the
present activity of a firm.
Intensive Strategy: firms intensify their efforts to boost sales and grow market
share
Market Development: seeks to increase market share by selling the present
products in new markets
Market Penetration: seeks to increase market share for existing products in the
existing markets through greater marketing efforts.
Vertical Integration: Expanding the firm's range of activities backward into the
sources of supply and/or forward into the distribution channels.
136 -
7. Self
9 Assessment Notes
Fill in the blanks:

The ............... defines the value proposition that the organisation will
1. customer .... apply to
satisfy customers.
The .............. focuses on all the activities and key processes required in order for
2. ..... the
company to excel at providing the value expected by the customers.
The .............. and .............. is the foundation of any strategy and focuses on the
3. ..... ..... intangible
assets of an
organisation.
4. ................... strategy implies continuing the current activities of the firm without any
significant change in direction.
A ............... strategy is a decision to do nothing
5. .... new.
6. ................... strategies are the most widely pursued corporate strategies.
7. ................... seeks to increase market share for existing products in the existing markets.
Market .............. seeks to increase market share by selling the present products in
8. ..... new
markets.
9. ................... seeks to increase the market share by developing new or improved products
for present markets.
10. ................... increases the dependability of the supply and quality of raw materials.
11. ................... involves gaining ownership or increased control over distributors or retailers.
................... is the process of adding new businesses to the existing businesses of the
12. company.
By expanding , the company can obtain new technologies and
13. into ................... products,
which can complement its present
businesses.
Competition as a reason of occurs in the form of product
14. corporate ................... and/or
price competition.
If a firm succeeds in making the customers to switch from the competitor's brands
to the firm's brands, while maintaining its existing customers intact, there will
be an increase in the firm's sales. Why/why not?
Explain the concept of product development. Under what conditions, do you think it
is feasible?
As a manager, in which situations would you apply vertical integration and why?
"Horizontal integration eliminates or reduces competition". Comment
Discuss the concept of last resort strategies. Under what conditions should they be applied?
"A firm is sick!" What do you mean by this statement? How can you prevent this sickness?
Do you think that the turnaround process is difficult? Why/why not?
Suppose you are the business head of a firm which is in deep financial trouble and
is losing customers because of lack of proper services. In such a situation,
what will you do and how would you justify your actions?
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137
Is using a combination of strategies better than using a single strategy? Justify

Notes 9. your
answer
10. Discuss the ways in which a firm can expand. Give suitable examples.
1. perspective 2. internal process
3. innovation, learning perspective 4. Stability
5. no change 6. Growth
7. Market penetration 8. development
9. Product development 10. Backward integration
11. Forward integration 12. Diversification
13. industries 14. decline
Books Adapted from Pearce JA and Robinson RB, Strategic Management,

McGraw Hill, NY, 2000.
W. Chan Kim and Renee Mauborgne, Blue Ocean Strategy, Harvard
Business School Press, 2005.
Wheelen Thomas L, David Hunger J, Krish Rangarajan, Concepts in
Strategic Management and Business Policy, New Delhi, Pearson
Education, 2006.
Online
links www.1000ventures.com/.../im_diversification_strategies
www.balancedscorecard.org/.../AbouttheBalancedScorecard
www.marketingteacher.com/.../lesson_generic_strategies.
www.netmba.com/strategy/turnaround
138 -
Unit 8: Business Level
Strategies
Unit 8: Business Level Note

s
Strategies
CONTENTS
Objectives
Introduction
Industry Structure
Positioning of the Firm
Generic Strategies
23 Risks in Competitive Strategies
24 Critical Assessment of Generic Strategies
25 Comment on Porter’s Generic Strategies
Business Tactics
Summary
Keywords
Self Assessment
Review Questions
Further Readings
Objectives

Define industry structure
Describe the positioning of firm
Discuss the generic strategies
Identify the business tactics
Introduction
Each business should have its own business strategy. A business strategy is basically a
competitive strategy and is concerned more with how a business competes successfully
in the chosen market. The strategic decisions at business-level revolve around choice of
products and markets, meeting the needs of customers, protecting market share,
gaining advantage over competitors, exploiting or creating new opportunities and
earning profit at the business unit level. In short, a business strategy outlines the
competitive posture of its operations in the industry.
Business strategy is guided by the direction set by the corporate strategy. It takes
the cue from the priorities set by the corporate strategy. It translates the direction
and intent generated at the corporate level into objectives and strategies for
individual business units.
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139
Notes
Example: A multi-business corporation like ITC assigns priorities in its
corporate strategy to its various businesses like cigarettes, vegetable oils, hotels,
agro-based products, financial services etc. The business strategies of these units
are formulated in accordance with those priorities. Business-level decisions also
help bridge decisions at the corporate level and functional levels.
8.1 Industry Structure
An industry is a collection of firms offering goods or services that are close

substitutes of each other. Alternatively, an industry consists of firms that directly
compete with each other. For the purpose of industry analysis, an industry can be
defined rather broadly (the beverage industry) or more precisely (the carbonated
soft drink industry). How one defines and circumscribes an industry depends on the
kinds of analysis to be performed. In “industry analysis”, it is generally better to
define an industry as precisely as possible.
Example: In discussing companies like Coca-Cola and Pepsi, one would want to
define the boundaries of the “carbonated soft drink industry” rather than that of the
“beverage industry”.
The term “industry structure” refers to the number and size distribution of firms in
an industry. The number of firms in an industry may run into hundreds or
thousands. The existence of a large number of firms in an industry reduces
opportunities for coordination among firms in the industry. Hence, generally
speaking, the level of competition in an industry rises with the number of firms in
the industry. The size distribution of firms in an industry is important from the
perspective of both business policy and public policy.
Industry structure consists of four elements:
Concentration
Economies of scale
Product differentiation
Barriers to entry.
Concentration: It means the extent to which industry sales are dominated by only
a few firms. In a highly concentrated industry, i.e. an industry whose sales are
dominated by a handful of firms, the intensity of competition declines over
time. High concentration serves as a barrier to entry into an industry, because
it enables the firms to hold large market shares to achieve significant
economies of scale.
Economies of Scale: This is an important determinant of competition in an
industry. Firms that enjoy economies of scale can charge lower prices than
their competitors, because of their savings in per unit cost of production. They
also can create barriers to entry by reducing their prices temporarily or
permanently to deter new firms from entering the industry.
Product differentiation: Real perceived differentiation often intensifies
competition among existing firms.
Barriers to entry: Barriers to entry are the obstacles that a firm must overcome to
enter an industry, and the competition from new entrants depends mostly on
entry barriers.
These features determine the strength of the competitive forces operating in the
industry. Trends affecting industry structure are important considerations in
strategy formulation.
140 -
Unit 8: Business Level Strategies
Notes
8.2 Positioning of the Firm
When starting a new firm or launching new product, a prime strategic decision is to
identify the target audience. But even though a useful segment has been identified,
this does not in itself resolve the organisation’s strategy. The competitive position
within the segment then needs to be explored, because only this will show how the
organisation will compete within the segment. Competitive positioning is thus the
choice of differential advantage that the product or services will posses against its
competitors. Competitive positioning allows an organisation to compete and survive
in a market place or in a segment of a market place. To develop positioning, it is
useful to follow a two-stage process-first identify the segment gaps, second identify
positioning within segments.
Identification of Segment Gaps and their Competitive Positioning Implications
From a strategy viewpoint, the most useful strategy analysis often emerges by
exploring where there are gaps in the segments of an industry. The starting point
for such work is to map out the current segmentation position and then place
companies and their products into the segments; it should then become clear
where segments exist that are not served or are poorly served by current products.
Identifying the Positioning within the Segment
From a strategy perspective, some gaps may be more attractive than others. For
example, they may have limited competition or poorly supported products. In
addition, some gaps may possess a clear advantage in terms of competitive
positioning. Others may not.
The process of developing positioning runs as follows:
Perceptual mapping: In-depth qualitative research on actual and prospective
customers on the way they make their decisions in the market place, e.g.
strong versus weak, cheap versus expensive, modern versus traditional.
Positioning: Brands or products are then placed on the map using the research dimensions.
Options development: Take existing and new products and use their existing
strengths and weaknesses to devise possible new positions on the map.
Testing: First with simple statements with customers, then at a later stage in the marketplace.
It will be evident that this is essentially a process, involving experimentation with
actual and potential customers.
Task Find out the positioning statements of major Indian banks.
8.3 Generic Strategies
Generic strategies were first outlined in two books from Michael Porter of Harvard
Business School. These were “Competitive Strategy” in 1980 and “Competitive
Advantage’’ in 1985. The second book contained a small modification of the
concept. The original version is explored here.
Michael Porter made the bold claim that there are only three fundamental
strategies that any business can undertake. During the 1980s, they were regarded
as being at the forefront of
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141
strategic thinking. Arguably, they still have a contribution to make in the new
Notes century in the
development of strategic options.
Professor Porter argued that the three basic strategies open to any business are:
1. Cost leadership
2. Differentiation
3. Focus.
Each of these generic strategies has the potential to overcome the five forces of
competition and
allow the firm to outperform rivals within the same industry. These are called
‘generic’ because
they can be used in a variety of situations, across diverse industries at various
stages of
development.
Figure 8.1: Generic Strategic Options
Competitive advantage
Lower cost Differentiation
Broad target Cost leadership Differentiation
Competitive scope
Focu
Narrow target s
Source: M. E. Porter (1985), Competitive Advantage, The Free Press, New York, Michael Porter.
Cost Leadership
Cost leadership is a strategy whereby a firm aims to deliver its product or service at
a price lower than that of its competitors. Overall cost leadership is achieved by the
firm by maintaining the lowest costs of production and distribution within an
industry and offering “no-frills” products. This strategy requires economies of scale
in production and close attention to efficiency and operating costs. The firm places
a lot of emphasis on minimizing direct input and overhead costs, by offering no-frills
products.
Example: Deccan Airways, Timex, Nirma.

A cost leadership strategy is likely to work better where the product is standardized,
competition is based mainly on price and consumers can switch easily between different
suppliers. However, a low cost base will not in itself bring competitive advantage. The
product must be perceived as comparable or acceptable by consumers. Firms pursuing
this strategy must be effective in engineering, purchasing, manufacturing, and physical
distribution. Marketing can be considered as less important, as the consumer is familiar
with the product attributes.
Notes An important feature of cost leadership is the effect of the experience curve,
in which the unit cost of manufacturing a product or delivering a service falls as
experience increases. In the same way that a person learning to knit or play the
piano improves with practice, so the unit cost of value added to a standard product
declines by a constant percentage (typically 20 to 30%) each time cumulative
output doubles (Grant, 2002). This allows firms to set initial low selling prices in the
knowledge that margins will increase
Contd...
142 -
as costs fall. The rate of travel down the cost experience curve is a crucial aspect Note
of staying s
ahead of the competition in an undifferentiated market and underlines the
importance of
market share if high volumes are not sold, the cost advantage is lost. Examples of
products
and services that are produced much more cheaply now are semiconductors,
watches, cars,
and travel reservations (on the Internet).
Having a low cost position also gives a company a defence against rivals. Its lower
costs allow
it to continue to earn profits during times of heavy competition. Its high market
share means
that it will have high bargaining power relative to its suppliers. Its low price also
serves as a
barrier to entry because few new entrants will be able to match the leader’s cost
advantage. As
a result, cost leaders are likely to earn above average profits on investment.
Companies that want to be successful by following a cost leadership strategy must
maintain
constant efforts aimed at lowering their costs (relative to competitor’s costs) and
creating value
for customers. Cost leadership requires:
Aggressive construction of efficient scale facilities
Vigorous pursuit of cost reductions from experience
Tight cost and overhead control
Avoidance of marginal customer accounts
Cost minimization in all activities in the firm’s value chain, such as R&D, services,
sales force, advertising etc.
Implementing and maintaining a cost leadership strategy means that a company
must consider its value chain of primary and secondary activities and effectively
link those activities with critical focus on efficiency and cost reduction. For example,
McDonald’s Restaurants achieved low costs through standardised products,
centralised buying of supplies for a whole country and so on.
How Low-cost Leadership Delivers Above-average Profits?
The profit advantage gained from low-cost leadership derives from the assertion
that low-cost leaders should be able to sell their products in the market place at
around the average price of the market–see line A-A in Figure 8.2. If such products
are not perceived as comparable or their performance is not acceptable to buyers,
a cost leader will be forced to discount prices below competition in order to gain
sales.
Figure 8.2
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143
Notes Compared with the low-cost leader, competitors will have higher costs - see line Y-Y
in the
Figure 8.2. After successful completion of this strategy option, the costs of the lowest-cost producer
will be lower by than those of other competitors–’see line X-X in the Figure 8.2.
This will deliver above-average profits to the low-cost leader.
To follow this strategy option, an organisation will place the emphasis on cost
reduction at
every point in its processes. It should be noted that cost leadership does not
necessarily imply a
low price. The company could charge an average price and reinvest the extra profits
generated.
Differentiation Strategy
Differentiation consists of offering a product or service that is perceived as unique or

distinctive by the customer. This allows firms to command a premium price or to retain
buyer loyalty because customers will pay more for what they regard as a better product.
A differentiation strategy can be more profitable than a cost leadership strategy because
of the premium price.
Products can be differentiated in a number of ways so that they stand apart from
standardized products:
1. Superior quality
2. Special or unique features
3. More responsive customer service
4. New technologies
5. Dealer network.
Example: Hero Honda, Nike athletic shoes, Sony, Asian Paints, Mercedes-Benz,
BMW etc.
Nokia achieves differentiation through the individual design of its product, while
Sony achieves it by offering superior reliability, service and technology. Mercedes-
Benz differentiates by stressing a distinctive product service image, while Coca Cola
differentiates by building a widely recognized brand. This strategy is often
supported by high spending on advertising and promotion to sustain the brand
identity.
McDonald’s is differentiated by its brand name and its ‘Big Mac’ and ‘Ronald
McDonald’ products and imagery. In order to differentiate a product, Porter argued
that it is necessary for the producer to incur extra costs, for example, to advertise a
brand and thus differentiate it.
The form of differentiation varies from industry to industry. In construction industry,
equipment durability, spare parts availability and service will feature, while in
cosmetics, differentiation is based on sophistication and exclusivity. Differentiation
is aimed at the broad mass market. It is a viable strategy for earning above average
profits because the resulting brand loyalty lowers customers’ sensitivity to price.
Buyer loyalty also serves as an entry barrier because new entrants must develop
their own distinctive competence to differentiate their products in some way to
achieve buyer loyalty.
It is essential for the success of this strategy that the premium price for the
differentiated product must exceed the cost of differentiation. For successfully
carrying out the differentiation strategy, the following are required:
1. Creative flair
2. Engineering skills
3. R&D capabilities
144 -
4. Innovative marketing capabilities Notes
Motivation for innovation

Corporate reputation for quality or technological capabilities.
How Differentiation Delivers Above-average Profits?
Figure 8.3
This is explained in Figure 8.3. As seen from the exhibit, Differentiated product costs
will be higher than those of competitors – see line Z-Z. The producer of the
differentiated product then derives an advantage from its pricing: with its uniquely
differentiated product it is able to charge a premium price, i.e. one that is higher
than its competitors – see line B-B in the Figure 8.3. This will deliver above average
profits to the company following differentiation strategy.
However, there are two problems associated with differentiation strategies:

It is difficult to estimate whether the extra costs incurred in differentiation can be
recovered from the customer by charging a higher price.
The successful differentiation may attract competitors to copy the differentiated
product and enter the market segment.
Neither of the above problems is insurmountable but they do weaken the
attractiveness of this option.
Focus Strategy
A focus strategy occurs when a firm focuses on a specific niche in the market place
and develops its competitive advantage by offering products especially developed
for that niche. It targets a specific consumer group (e.g. teenagers, babies, old
people etc.) or a specific geographic market (urban areas, rural areas etc.).
Hence, the focus strategy selects a segment or group of segments in the industry
and tailors its strategy to serve them to the exclusion of others. By optimizing its
strategy, for the targets, the focuser seeks to achieve competitive advantage in its
target segments, even though it does not possess a competitive advantage overall.
145
As Porter observes, while the low cost and differentiation strategies are aimed at
Notes achieving their
objectives industry-wide, the entire focus strategy is built around serving a
particular target
very well.
Sometimes, according to Porter, neither a low-cost leadership strategy nor a
differentiation
strategy is possible for an organisation across the broad range of the market.
Example: The costs of achieving low-cost leadership may require substantial

funds which
are not available.
Equally, the costs of differentiation, while serving the mass market of customers,
may be too
high. If the differentiation involves quality, it may not be credible to offer high
quality and
cheap products under the same brand name. So a new brand name has to be
developed and
supported. For these and related reasons, it may be better to adopt a focus
strategy.
The focus strategy has two variants:

1 Cost focus: A firm seeks to achieve low cost position in its target segment
. only.
2 Differentiation focus: A firm seeks to differentiate its products in its target
. segment only.
The essence of focus strategy is the exploitation of a narrow target’s differences
from the balance
of the industry. Focus builds competitive advantage through high specialization and
concentration of resources in a given niche. A focus strategy can serve the needs of
a niche
segment (a) by identifying gaps not covered by existing players, and (b) by
developing superior
skills or efficiency while serving such narrow segments. By targeting a small,
specialized group
of buyers it should be possible to earn higher than average profits, either by
charging a premium
price for exceptional quality or by a cheap and cheerful low priced product. In the
global car
market, Rolls Royce and Ferrari are clearly niche players. They have only a minute
percentage
of the market world-wide. Their niche is premium product and premium price.
The focus strategy rests on the premise that the firm is able to serve its narrow
strategic target
more effectively and efficiently than competitors who are competing more broadly.
As a result,
the firm achieves either differentiation from better meeting the needs of the
particular target, or
lower costs in serving this target, or both. Even though the focus strategy does not
achieve low
cost or differentiation industry-wide, it does so in its narrow market target.
The focus strategy requires for its success the same common factors, as are
required for the
success of cost leadership and differentiation, except that they are directed at the
particular
target market. In the Indian context, examples of focus strategy are Ayur Herbal
Brand, Anjali
Kitchenware, Anchor toothpaste, T-series Cassettes etc.
There are, however, some problems with the focus strategy:

1 By definition, the niche is small and may not be large enough to justify
. attention.
2 Cost focus may be difficult if economies of scale are important in an industry
. such as the
car industry.
3
. The niche is clearly specialist in nature and may disappear over time.
None of these problems is insurmountable. Many small and medium-sized
companies have found that this is the most useful strategy to explore.
8.3.1 Risks in Competitive Strategies
No one competitive strategy is guaranteed for success. Some companies that have
successfully implemented one of Porters’ competitive strategies have found that
they could not sustain the strategy. Each of these generic strategies has its own
risks.
146 -
1. Risks of cost leadership: Notes
Cost leadership may not be sustained

23 If competitors imitate
24 If technology changes
25 If other bases for cost leadership erode.
Proximity in differentiation is lost.
Cost focusers achieve even lower costs in segments.
Proximity in differentiation means that companies that choose cost leadership
strategy must offer relatively standardized products with features or
characteristics that are acceptable to customers. In other words, the company
must offer a minimum level of differentiation–at the lowest competitive price.
If this minimum level of differentiation is lost, then the strategy of cost
leadership will fail.
Risks of differentiation:
23 Differentiation may not be sustained
If competitors imitate.
If features of differentiation become less important to buyers.
24 Cost proximity is lost.
25 Firms that follow focus strategy may achieve even greater differentiation in segments.
26 Dilution of brand identification through product-line.
A company following a differentiation strategy must ensure that the higher price it
charges for its higher quality is not priced too far above the competition, otherwise
customers will not see the extra quality as worth the extra cost. In other words, if
the price differential between the standardized and differentiated product is too
high, the risk is that the company provides a greater level of uniqueness than the
customers are willing to pay for.
Risks of Focus: The competitive risks of focus strategy are similar to those
previously noted for cost leadership and differentiation strategies, with the
following additions:
23 Focus strategy is not sustained if competitors imitate it.
24 The target segment may become structurally unattractive.
if structure erodes.
if demand disappears.
25 Competitors may successfully focus on an even smaller segment of the
market, out focusing the focuser, or focus only on the most profitable
slice of the focuser’s chosen segment.
26 An industry-wide competitor may recognize the attractiveness of the
segment served by the focuser and mobilize its superior resources to
better serve the segment’s need.
27 Preferences and needs of the narrow segment may become more similar
to the broad market, reducing or eliminating the advantage of focusing.
-
147
Notes Stuck-in-the Middle
Professor Porter concluded his analysis of what he termed the main generic
strategies by suggesting that there are real dangers for the firm that engages in
severed generic strategies but fails to achieve any of them. He therefore
emphasized the importance of clear positioning i.e., either follow cost leadership or
differentiation. He called firms that do not have clear strategic positioning and
which make choices that include a few elements of different strategies (i.e. some
elements of differentiation and some elements of cost leadership) as firms stuck–in-
the-middle. He suggested that such firms do not develop successful competitive
advantage. But this concept of stuck-in-the–middle has been an issue of debate.
Several commentators, such as Kay, Stopford and Baden-Fuller and Miller now
reject this aspect of the analysis. They point to several empirical examples of
successful firms that have adopted more than one generic strategy.
As was pointed out above, there is now useful empirical evidence that some
companies do pursue differentiation and low-cost strategies at the same time. They
use their low costs to provide greater differentiation and then reinvest the profits to
lower their costs even further.
Example: Benetton (Italy), Toyota (Japan) and BMW (Germany)
Did u know? What are Hybrid Strategies?
Hybrid strategies include a combination of generic strategies, for example,

simultaneous pursuing of both low cost leadership and differentiation strategy.
Research has found that such hybrid strategies have contributed to
competitive advantage in some situations. For example, successful
implementation of differentiation strategy may result in increased sales
volume and as sales volume increases costs drop due to economies of scale.
Thus successful differentiators can also be the lowest cost producers in an
industry.
Porter (1994) later offered some clarification: “A company cannot completely
ignore quality and differentiation in the presence of cost advantages, and vice-
versa. Progress can be made against both types of advantage simultaneously.”
However, he notes that these are trade–offs between the two and that
companies should “maintain a clear commitment to superiority in one of
them”.
8.3.2 Critical Assessment of Generic Strategies
The generic business-level strategies discussed above are useful when we view an
industry as stable. However, in practice, business environment is dynamic and
successful firms need to adapt their strategies to the environmental conditions.
More (2001) notes that each generic strategy gives a company some kind of
defence against each of the five competitive forces.
Example: Cost leadership can raise barriers to cope with cost increases form
suppliers.
Differentiation based on strong brand loyalty, can create an entry barrier and also
insulate the firm from rivalry. But there are risks in this.
Example: Consumer loyalty can falter if the price premium is perceived as too
high, and differentiation can be lost through imitation of a product by competitors.
The other risks have already been discussed in the previous sections.
148 -
Notes
8.3.3 Comment on Porter’s Generic Strategies
Hendry ll and others have set out the problems of the logic and the empirical evidence
associated with generic strategies that limit its absolute value. We can summarize them
as follows:
Low-cost Leadership
If the option is to seek low-cost leadership, then how can more than one company be the
low-cost leader? It may be a contradiction in terms to have an option of low-cost
leadership.
Competitors also have the option to reduce their costs in the long-term, so how can
one company hope to maintain its competitive advantage without risk?
Low-cost leadership should be associated with cutting costs per unit of production.
However, there are limitations to the usefulness of this concept.
Low-cost leadership assumes that technology is relatively predictable, if changing.
Radical change can so alter the cost positions of actual and potential
competitors.
Cost reductions only lead to competitive advantage when customers are able to
make comparisons. This means that the low-cost leader must also lead price
reductions or competitors will be able to catch up, even if this takes some
years and is at lower profit margins. But permanent price reductions by the
cost leader may have a damaging impact on the market positioning of its
product or service that will limit its usefulness.
Differentiation
Differentiated products are assumed to be higher priced. This is probably too

simplistic. The form of differentiation may not lend itself to higher prices.
The company may have the objective of increasing its market share, in which case
it may use differentiation for this purpose and match the lower prices of
competitors.
Porter discusses differentiation as if the form this will take in any market will be
immediately obvious. The real problem for strategy options is not to identify
the need for differentiation but to work out what form this should take that will
be attractive to the customer. Generic strategy options throw no light on this
issue whatsoever. They simply make the dubious assumption that once
differentiation has been decided on, it is obvious how the product should be
differentiated.
Focus
The distinction between broad and narrow targets is sometimes unclear. Are they
distinguished by size of market? Or by customer type? If the distinction
between them is unclear then what benefit is served by focus?
For many companies, it is certainly useful to recognise that it would be more
productive to pursue a niche strategy, away from the broad markets of the
market leaders. That is the easy part of the logic. The difficult part is to
identify which niche is likely to prove worthwhile. Generic strategies provide
no useful guidance on this at all.
As markets fragment and product life cycles become shorter, the concept of broad
targets may become increasingly redundant.
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149
Notes Resource-based View
In an earlier unit, we explored the arguments supporting this view of strategic

analysis. They also apply to strategy options and suggest that options based on the
uniqueness of the company rather than the characteristics of the industry are likely
to prove more useful in developing competitive strategy. The resource-based view
does undermine much of Porter’s approach.
Fast-moving Markets
In dynamic markets such as those driven by new internet technology, the

application of generic strategies will almost certainly miss major new market
opportunities. They cannot be identified by the generic strategies approach.
Faced with this veritable onslaught on generic strategies, it might be thought that
Professor Porter would gracefully concede that there might be some weaknesses in
the concept.
However, Porter hit back in 1996 by drawing a distinction between basic strategy and
what he called ‘operational effectiveness’ – the former is concerned with the key
strategic decisions facing any organisation while the latter are more concerned with such
issues as TQM, outsourcing, re-engineering and the like. He did not concede any ground
but rather extended his approach to explore how companies might use market
positioning within the concept of generic strategies.
Given these criticisms, it should not be concluded that the concept of generic
strategies has no merit. As part of a broader analysis, it can be a useful tool for
generating basic options in strategic analysis. It forces exploration of two important
aspects of business strategy: the role of cost reduction and the use of differentiated
products in relation to customers and competitors. But it is only a starting point in
the development of such options. When the market is growing fast, it may provide
no useful routes at all. More generally, the whole approach takes a highly
prescriptive view of strategic action.
Case Study
Wal-Mart's Cost Leadership Strategy
On July retailing,
2, 1962, set
Samuel Moore
up his first Walton,
discounta store
merchant with over
in Rogers, 15 years
a small townofinexperience in
the state of
Arkansas, US. The store offered a wide variety of branded merchandise at a
competitive price.
During the initial years, Walton focused on establishing new stores in small
towns, with an average population of 5,000. These towns were largely
neglected by leading retailers like Sears Roebuck & Company, K-Mart and
Woolco, which concentrated more on larger towns and big cities. In his efforts
to attract people from the rural areas to his stores, Walton introduced the
concept of Every Day Low Prices (EDLP).
EDLP promised Wal-Mart's customers a wide variety of high quality, branded
and unbranded products at the lowest possible price, offering better value for
their money. Wal-Mart's advertisement describing EDLP said,
"Because you work hard for every dollar, you deserve the lowest price we can
offer every time you make a purchase. You deserve our Every Day Low Price.
It's not a sale; it's a great price you can count on every day to make your
dollar go further at Wal-Mart."
Contd.
..
150 -
From the very beginning, Walton made efforts to procure products at the lowest Note
prices s
possible from manufacturers.
He always shared these savings with customers by charging them lower prices, thus
giving them the maximum value for their money.
Wal-Mart's products were usually priced 20% lower than those of its competitors.
Walton's
pricing strategy led to increased loyalty from price-conscious rural customers. It
helped
the company to generate more profits due to larger volumes. Explaining his pricing
strategy, Walton said, "By cutting your price, you can boost your sales to a point
where
you earn far more at the cheaper retail price than you would have by selling the item
at the
higher price. In retailer language, you can lower your markup but earn more because
of
the increased volume." EDLP was extremely attractive to rural customers and
emerged as
the key contributor to Wal-Mart's growth over the years.
Offering products at EDLP, especially during its early years, when Wal-Mart was not
an
established retail player, was quite difficult. The company aggressively followed a
cost
leadership strategy that involved developing economies of scale and making
consistent
efforts to reduce costs.
The surplus generated was reinvested in building facilities of an efficient scale,
purchasing
modern business-related equipment and employing the latest technology. The
reinvestments made by the company helped it to maintain its cost leadership
position.
From the start, Wal-Mart imposed a strict control on its overhead costs. The stores
were set
up in large buildings, while ensuring that the rent paid was minimal. The company
imposed an upper limit for its rent payment at $1.00 per square foot during the late
1960s.
Not much emphasis was laid on the interiors of the stores. The company did not
invest on
standardized ordering programs and on basic facilities to sort and replenish the stock.
In the early 1990s, Wal-Mart started focusing on its Supercenters and Sam's Clubs to
fuel
growth. Wal-Mart expanded its operations into the Northeast and West of the US by
placing a lot of emphasis on the groceries business through its Supercenters. The
modus
operandi was to first establish discount stores, after which the best performing stores
were to be converted into Supercenters.
By 1991, Wal-Mart's mammoth retail network comprised of 1,355 discount stores, 120
Sam's Clubs and three Supercenters being served by 16 distribution centers.
However, at this time, Wal-Mart had yet to enter as many as 23 states in the US. In
the early
1990s, it was estimated that the size of the groceries business in the US was three
times that
of the discount store business. So, Wal-Mart decided to focus on Supercenters to
propel its
growth. Following Walton's death in 1992, David Glass succeeded him as the CEO of
Wal-
Mart. Glass viewed food retailing as a key driver to increase revenue growth in the
1990s.
By the beginning of the new millennium, Wal-Mart was one of the world's largest
companies, with revenues of $165 billion in fiscal 2000. Wal-Mart's rapid growth
continued
in the initial years of the new millennium.
While continuing its aggressive expansion in the food business, the company started
launching innovative programs to further penetrate the US markets. For instance, in
2001,
Wal-Mart launched a program, called 'Store of the community.' Under the program,
Wal-
Mart began remodeling its discount stores and Supercenters in the US to fulfill the
needs
of customers they served, in line with what the customers wanted. Explaining the
program,
Tom Coughlin, President and CEO of Wal-Mart Stores Division, said, "The one-size-fits-
all concept simply doesn't work anymore in the retail industry. Customers tell us what
they want and it is our responsibility to meet those needs. Our store associates live
and
work in each store's community and interact with over 100 million customers each
week.
Contd...
151
Wal-Mart has chalked out an aggressive expansion plan to accelerate its growth
Notes in the
near future. At the fiscal year ending 2007-08, Wal-Mart achieved a revenue
target of $500
billion.
Questions
What problems do you think would have been faced by Wal-Mart initially to
1. offer
products at cheapest prices?
After analysing the above case, do you think every company should aim at
2. cost
leadership?
8.4 Business Tactics
Tactics should work with a firm’s strategy and they are the set of requirements need
for the plan to take place. A tactic is a device used by the firm for meeting your
goals set by your strategy. Strategy and tactics should always be relative to one
another because the tactics are the set of actions needed to fulfill your strategy.
Tactics are the tools used to achieve goals.
Tactics include things like advertising and marketing.
Tactics are the steps taken to achieve goals.
Brand Management
One tactic that almost every firm employs is strategic brand management. Firms
must find a way to communicate their products and corporate philosophy to
potential customers. Over time, a business can establish a reputation that gives its
brand name an advantage over the lesser known competitors.
Brand management includes good advertising and public relations to present an image
of that is consistent with the mission and vision of the company. A company may also
conduct research or poll the general public to learn about how it is perceived and what
changes are necessary.
Diversification and Specialisation
Two different business strategies that deal with the scope of a company are
diversification and specialisation. A business can diversify by simply expanding its
products and services, such as adding a new division, or through merging or
acquiring another business.
Specialisation is the opposite of diversification. It refers to narrowing a business’s
products to focus on a more specific type of product. By focusing limited resources
on a smaller product line, a business may hope to improve the quality of its
remaining products, or simply divest itself of an unprofitable product.
Research and Development
Some firms use investments into research and development as a major tactic to get
ahead of competitors. This is particularly true in the manufacturing field, where new
product technologies can save money and produce products that will excite consumers.
Smaller businesses may lack the money or in-house talent to invest directly in research
and development, but for larger companies the ability to innovate can be the difference
between success and failure.
152 -
Risk Management Notes
Managing risk is a tactic that every firm employs in its own way. The simple act of
founding a business is itself a risk, since market trends and customer behaviour can
be difficult to predict. For an established business, managing risk means making
good decisions about where to invest funds and what types of products to focus on.
Task Identify the tactics and strategies used by Nestle Maggi to tackle competition.
Caselet Brand Repositioning – Maruti Suzuki Wagon R
F rom
B ‘Feel at home’
segment
positioning.
of thetopassenger
‘Inspired Engineering’- Maruti
car market, the WagonUdyog’s premium product
R, is undergoing in the
a new brand
This shift in emphasis, say company officials, is on account of the Multi-

Activity Vehicle’s tremendous success.
An almost 100 per cent jump in sales in October 2002 over that in October
2001 and a 23 per cent increase in sales for the April-October 2002 period
over the same period last year is what has prompted Maruti to go in for this
new brand positioning.
According to the company officials, Maruti sold 3,381 units of the Wagon R in
October 2002 against 1,680 in October last year — a 101 per cent growth.
Likewise, the company sold 17,531 units of the car in April-October 2002
against 14,291 in the same period last year.
Buoyed by the encouraging sales, the officials say, Maruti will shortly launch
the new campaign based on the ‘Inspired Engineering’ theme. It takes on from
the earlier campaign that focussed on the ‘Feel at home’ theme, which helped
establish a strong emotional bond with the target consumer, they say.
The new campaign will focus on Wagon R, a uniquely designed product for people
who lead interesting lives. The product gels with their lifestyle, reflecting their
confidence and multifaceted personality. By sheer excellence of engineering it
enables them to be whatever they choose to be — and that is what makes the
buyers interested, point out the officials.
According to them, the new positioning “Wagon R — Inspired Engineering”
reflects the fact that the car is a piece of unmatched, excellent engineering
and that some of the most interesting and discerning people drive it.
“It defied convention and changed the way people looked at a car. It is simply
unmatched in performance and comfort. Test-drive one and you’ll never settle for
anything ordinary again,” goes the caption for one of the print advertisements,
while another goes like this: “There are some people who tower over the others.
They follow their hearts, create their own rules and lead much fuller lives. The
Wagon R is for such people. The result of inspired engineering, it defied convention
and changed the way people looked at a car...“
According to the officials, the new brand positioning is based on research that
showed the Wagon R buyer as being balanced, ambitious, discerning, self-
assured and intelligent. At the same time, they have deep-rooted human
values. Thus, they lead fuller lives. “Thus the new positioning is in sync with
the personality of the buyer and the product,” the officials say.
Source: www.thehindubusinessline.com
-
153
Notes
8.5 Summary
Business conditions are always changing, so it’s a good practice to

periodically step back and take a hard look at the business strategy and
analyse its implementation.
Business Strategy can be defined as a long-term approach to implementing a
firm’s business plans to achieve its business objectives.
A business strategy addresses how the firm competes in a market and how it
attains and sustains competitive advantage.
The term “industry structure” refers to the number and size distribution of
firms in an industry.
The competitive position within the segment then needs to be explored,
because only this will show how the organisation will compete within the
segment.
Cost Leadership Strategy emphasises efficiency. By producing high volumes of
standardised products, the firm hopes to take advantage of economies of scale
and experience curve effects.
The product is often a basic no-frills product that is produced at a relatively
low cost and made available to a very large customer base.
Differentiation is aimed at the broad market that involves the creation of a
product or services that is perceived throughout its industry as unique. The
company or business unit may then charge a premium for its product.
Focus Strategy concentrates on a select few target markets and is also called
a segmentation strategy or niche strategy.
8.6 Keywords
Cost Leadership: A strategy whereby a firm aims to deliver its product or service
at a price lower than that of its competitors.
Differentiation: Offering a product or service that is perceived as unique or
distinctive by the customer.
Focus Strategy: The strategy in which a firm focuses on a specific niche in the
market place and develops its competitive advantage by offering products
especially developed for that niche.
Industry: A collection of firms offering goods or services that are close substitutes
of each other.
Positioning: Occupying a distinct position in the minds of consumers.
8.7 Self Assessment
Fill in the blanks:

1. ....................means the extent to which industry sales are dominated by only a
few firms.
Competitive positioning gives.............................advantage to the firms.
.............................are the tools used for meeting the goals and objectives as
3. designed by the
strategy.
A company focuses only the production of ladies shoes. This is an example
of............................
154 -
Each of these generic strategies has the potential to overcome the Note
5. .................. of competition. s
6. A cost leadership strategy is likely to work better where the product is ..................
Compared with the low-cost leader, competitors will
7. have .................. costs.
The ............. strategy selects a segment or group of segments in the industry and
8. ..... tailors
its strategy to serve them to the exclusion of
others.
If the differentiation involves quality, it may not be credible to ..................
9. offer quality
and ............. products under the same brand
..... name.
Hybrid strategies include a combination
10. of .................. strategies.
Which industry is Vodafone a part of? Identify the features of that industry and
comment on its status in India.
Critically analyse the benefits of positioning for a firm.
Suppose you are the CEO of a cosmetic firm. Under what situations would you
choose a low-cost, differentiation, or speed-based strategy?
Illustrate how a firm can pursue both low-cost and differentiation strategies.
Identify requirements for business success at different stages of industry evolution.
Discuss the good business strategies in fragmented and global industries.
“Diversification is a double edged sword”. Comment
There are many risks in cost leadership strategy. What are they and how would it
affect you as a manager?
Under what condition(s) do you think would the cost leadership strategy work better?
In which situations do you think that the neither a low cost nor a differentiation
strategy would be possible for an organisation?
Are tactics different from business strategies? Give reasons for your answer.
“Business strategy and tactics go hand in hand”. Discuss
1. Concentration 2. Differential
Specialisati
3. Tactics 4. on
Standardise
5. Five forces 6. d
7. Higher 8. Focus
9. High, cheap 10. Generic

-
155
Notes
8.9 Further
Readings
Books Azhar Kazmi, Strategic Management and Business Policy- 3rd edition,
Tata McGraw Hill
C Appa Rao, B Parvathiswara Rao and K Sivaramakrishna, Strategic
Management and Business Policy-Text and Cases, Excel Books
David Fred, Strategic Management: Concepts and Cases-12th edition,
Prentice Hall of India
www.1000ventures.com/business_guide/sbu
Online
links www.economicexpert.com/.../Flanking:marketing:warfare:strategies
www.quickmba.com/strategy/generic.shtml
156 -
Unit 9: Strategic Analysis and
Choice
Unit 9: Strategic Analysis and Note

s
Choice
CONTENTS
Objectives
Introduction
Process for Strategic Choice
23 Focusing on a few Alternatives
24 Considering Selection Factors
25 Evaluating the Alternatives
26 Making the Actual Choice
Strategic Analysis
Industry Analysis
Corporate Portfolio Analysis
23 Display Matrices
24 Balancing the Portfolio
25 Portfolio and other Analytical Models
Contingency Strategies
Summary
Keywords
Self Assessment
Review Questions
Further Readings
Objectives
After studying this unit, you will be able

to: Describe the process for strategic
choice
Explain the concept of strategic and industry
analysis
State the concept of corporate portfolio
analysis
Discuss the contingency strategies
-
157
Notes
Introduction
Strategic analysis and choice is essentially a decision-making process. This involves

generating feasible alternatives, evaluating those alternatives and choosing a
specific course of action that could best enable the firm to achieve its mission and
objectives.
Alternative strategies do not come from a vacuum. They are derived from the firm’s
present strategies keeping in view the vision, mission, objectives and also the
information gathered from external and internal analysis. They are consistent with
or built on past strategies that have worked well.
9.1 Process for Strategic Choice
According to Glueck and Jauch, “strategic choice is the decision to select from
among the alternatives considered, the strategy which will best meet the enterprise
objectives.”
This decision-making process consists of four distinct steps:
Focusing on a few alternatives.
Considering the selection factors.
Evaluating the alternatives.
Making the actual choice.
9.1.1 Focusing on a few Alternatives
Strategists never consider all feasible options that could benefit the firm because
there are innumerable options. So strategists should narrow down the choice to a
reasonable number of alternatives. But it is still difficult to tell what that reasonable
number is. For deciding on a reasonable number of alternatives, we can make use
of the following concepts:
Gap analysis
Business Definition
Gap Analysis
In gap analysis, a company sets objectives for a future period of time, say three to
five years of time, and then works backward to find out where it can reach at the
present level of efforts. By analysing the difference between the projected and
desired performance, a performance gap could be found as shown in the figure
below.
Figure 9.1: Gap Analysis
Desired performance
Gap
Projected performance
Where the gap is narrow, stability strategies would seem to be a feasible

alternative. If the gap is large, expansion strategies are more suitable to be
considered. If the gap is large due to past and expected bad performance,
retrenchment strategies need to be considered.
158 -
Unit 9: Strategic Analysis and Choice
Business Definition Notes
In deciding on what would be a manageable number of alternatives, it is advisable

to start with the business definition. Business definition, as discussed earlier,
determines the scope of activities that can be undertaken by a firm. It tries to
answer three basic questions clearly: (i) who is being satisfied? (ii) what is being
satisfied? and (iii) how the need is being satisfied?
Figure 9.2: Three Dimensions of a Business Definition
Customer Needs
Customer
Alternative Groups
Technologie
s
The three dimensions along which a business is defined help a strategist to chalk
out alternatives in a systematic manner.
9.1.2 Considering Selection Factors
The concepts of Gap Analysis and Business definition would help the strategist to
identify a few workable alternatives. These must be analysed further against a set
of selection criteria.
Selection factors are the criteria against which the alternative strategies are
evaluated. These selection factors consist of:
Objective factors
Subjective factors.
Objective factors are based on analytical techniques such as BCG matrix, GE
matrix etc. and are hard facts or data used to facilitate a strategic choice.
They are also called rational, normative or prescriptive factors.
Subjective factors, on the other hand, are based on one’s personal judgment or
descriptive factors such as consistency, feasibility, etc. which are discussed in the
previous unit.
Evaluating the Alternatives
After narrowing down the alternative strategies to a few alternatives, each

alternative has to be evaluated for its suitability to achieve the organisational
objectives. Evaluation of strategic alternatives basically involves bringing together
the results of the analysis carried out on the basis of objective and subjective
criteria.
Making the Actual Choice
An evaluation of alternative strategies leads to a clear assessment of which alternative is

most suitable to achieve the organisational goals. The final step, therefore, is to make
the actual choice. One or more strategies have to be chosen for implementation. Besides
the chosen strategies, some contingency strategies should also be worked out to meet
any eventualities. In both the above two steps, a number of portfolio analyses like BCG,
nine–cell matrix etc., can be useful.
-
159
Notes
9.2 Strategic Analysis
Fred R David has developed a comprehensive strategy formulation and analytical

framework which is very useful for strategic analysis and choice. We now discuss
the framework briefly.
This framework consists of three stages:
Input stage
Matching stage
Decision stage
The following table summarises the basic information needed at each stage of the
analytical framework.
Figure 9.3: Strategy Formulation and Analytical Framework
Stage 2: Matching Stage 3: Decision

Stage 1: Input Stage Stage Stage
External Factor SWOT matrix Quantitative Strategic

Planning Matrix
Evaluation (EFE) matrix SPACE matrix (QSPM)
Competitive Profile BCG matrix
Matrix (CPM) Internal-External
Internal Factor (IE) matrix
Evaluation (IFE) matrix Grand strategy matrix
Input Stage
This stage summarises the basic input information needed to generate alternative
strategies. This basic input information relates to the opportunities and threats,
strengths and weaknesses as also the competitive profile of the firm. This
information can be obtained from the following three matrices:
External Factor Evaluation Matrix (EFE Matrix)
Internal Factor Evaluation Matrix (IFE Matrix)
Competitive Profile Matrix (CPM Matrix)
Making small decisions on the relative importance of external and internal factors
allows strategists to generate and evaluate alternative strategies more effectively.
Besides, good intuitive judgment is always needed in determining appropriate
weights and ratings.
Matching Stage
This stage involves the match between the internal resources and skills and the external
opportunities and threats of an organisation. The following matrices can be used for the
purpose:
SWOT Matrix (Already discussed in unit 5)
SPACE Matrix
BCG matrix
Internal-External Matrix
Grand Strategy Matrix
160 -
These tools use the information provided by the input stage and help the strategists to Note
match s
external opportunities and threats with internal strengths and weaknesses.
Example: If a firm that has an internal weakness of insufficient capacity has to

tap an
external opportunity caused by the exit of two major foreign competitors from the
industry; it
may pursue horizontal integration by buying competitor’s facilities.
The other matrices are explained in the section “Portfolio Analysis” of this unit.
Decision Stage
The matching techniques discussed above reveal feasible alternative strategies,

which need to be examined and appropriate strategies selected for implementation.
With the help of techniques like QSPM (Quantitative Strategic Planning Model) the
strategies can be prioritised so that the best strategies could be chosen.
QSPM is explained in the “Portfolio Analysis” section of this unit.
9.3 Industry Analysis
The basic purpose of industry analysis is to assess the strengths and weaknesses of
a firm relative to its competitors in the industry. It tries to highlight the structural
realities of particular industry and the extent of competition within that industry.
Through industry analysis, an organisation can find whether the chosen field is
attractive or not and assess its own position within the industry.
Importance of Industry Analysis
Macro environment is common to all industries. It remotely affects the industry. It is

the structural realities of the specific industry and the nature and intensity of
competition unique to that industry that are of special relevance to the firm in
formulating strategy.
!
Caution Industry structure, industry boundaries and industry attractiveness are
essential for conducting an environmental survey. With industry and competition
analysis, the firm actually gets into the study of proximate environment.
Factors that more directly influence a firm’s prospects originate in the environment
of its industry. Good industry and competitive analysis is a pre-requisite to good
strategy making. A competently done analysis tells a clear, easily understood story
about the company’s environment needed for shrewdly matching strategy to the
company’s external situation.
The importance of industry analysis can thus be summarised as follows.
Industry – related factors have a more direct impact on the firm than the general
environment.
An industry’s dominant economic characteristics are important because of their
implication for crafting strategy.
Industry analysis reveals industry attractiveness and its prospects for growth.
It helps the firm to identify such aspects as:
23 Current size of the industry
24 Product offerings
-
161
Strategic
Management
Notes (c) Relative volumes
25 Performance of the industry in recent years

26 Forces that determine competition in the industry.
It focuses attention on the firm’s competitors.
It helps to determine key success factors.
A thorough understanding of the industry provides a basis for thinking about
appropriate strategies that are open to the firm.
9.4 Corporate Portfolio Analysis
Many companies offer more than one product, and serve more than one customer.
They have a portfolio (i.e. a basket) of products. This is a good strategy because a
firm which is dependent on one product or customer runs immense risk. Decisions
on strategy, therefore, generally involve a range of products in a range of markets.
Portfolio analysis is an analytical tool which views a corporation as a basket or
portfolio of products or business units to be managed for the best possible returns,
and help a corporate to build a multi-business strategy.
When an organisation has a number of products in its portfolio, it is quite likely that
they will be in different stages of development. Some will be relatively new and
some much older. Many organisations will not wish to risk having all their products
at the same stage of development. It is useful to have some products with limited
growth but producing profits steadily, and some products with real growth potential
but may still be in the introductory stage. Indeed, the products that are earning
steadily may be used to fund the development of those that will provide the growth
and profits in the future.
So, the key strategy is to produce a balanced portfolio of products, some with low
risk but dull growth and some with high-risk but great potential for growth and
profits. This is what we call portfolio analysis.
The aim of portfolio analysis is:
To analyse its current business portfolio and decide which business should receive
more or less investment.
To develop growth strategies for adding new businesses to the portfolio.
To decide which business should no longer be retained.
Did u know? Several leading consulting firms developed a number of “portfolio

matrices” during the 1970s and 1980s to achieve a better understanding of the
competitive position of overall portfolio of businesses, to suggest strategic
alternatives of each of the businesses and to identify priorities for allocation of
resources. The basis for many of these matrices grew out of the BCG matrix
developed by the Boston Consulting Group in the 1970s.
Display Matrices
“Display matrices” are simple frameworks in which products or business units are
displayed as a series of investments from which top management expects a
profitable return. It charts and characterises different products or businesses in the
organisation’s portfolio of investments in such a way that top management
constantly juggles to ensure the best returns from them.
162 -
As already stated, key purpose of portfolio models is to assist in achieving a balanced Note
portfolio s
of businesses. This means that portfolio should consist of those businesses whose
profitability,
growth, cash flow and risk elements would complement each other, and add up to a
satisfactory
overall corporate performance. Imbalance in portfolio, for example, could be caused
either by
excessive cash generation with too few growth opportunities or by insufficient cash
generation
to fund the growth requirements of other businesses in the portfolio.
9.4.2 Balancing the Portfolio
Balancing the portfolio means that the different products or businesses in the
portfolio have to be balanced with respect to four basic aspects:
Profitability: The main aim of the portfolio analysis is to maintain the overall
profitability of the corporation, even though some of the businesses are loss
making. This is ensured through balancing investments.
Cash flow: A growing firm may be profitable, but it will also require additional cash
outflows for investment requirements. Mature businesses, though less
profitable, do not require much of investments though they may not be net
cash generators. Thus, portfolio analysis must balance different businesses,
which together must give a comfortable overall cash flow position in harmony
with the desired strategy of the company.
Growth: All businesses or products go through the life cycle of introduction,
growth, maturity and decline stages. If a company depends on one product
alone, it would face problems in the declining stage of the product. It may be
too late to start a new product at this stage because of the time lag involved
in waiting till it achieves its growth rate. It is therefore better to match
different businesses at different stages in their life cycles, to achieve stability
which is sometimes called “extended corporate immortality”. Thus the
balancing of the portfolio implies that though individual businesses grow,
mature and decline, yet the company continues to grow.
Risk: Another major objective of portfolio analysis is to reduce the risk due to
economic trends and market forces in a country. The aim is to put together
diverse businesses with different or even opposite market forces to ensure a
stable and smoother financial performance of the overall corporation.
Example: One solution could be to diversify internationally, since markets in

different countries are subject to different economic forces. Similarly, in the context
of domestic markets, businesses with different seasonal cycles could be combined
to ensure a more stable and smooth performance of the overall corporation.
9.4.3 Portfolio and other Analytical Models
Innumerable analytical models have been developed by several leading consulting

firms. Some of the best-known models are:
BCG matrix
GE Nine-cell Matrix
Hofer’s Product/Market Evolution Matrix
Directional Policy Matrix
Arthur D Little’s Portfolio Matrix
Profit Impact of Market Strategy (PIMS) Matrix
-
163
Notes 7. SPACE Matrix
Quantitative Strategic Planning Matrix (QSPM)
BCG Matrix
The BCG matrix was developed by the Boston Consultancy group in 1970s. It is also
called the “Growth share matrix”. This is the most popular and the simplest matrix
to describe a corporation’s portfolio of businesses or products. BCG matrix is based
on the premise that majority of the companies carry out multiple business activities
in a number of different product-market segments. Together, these different
businesses form the business portfolio of the company, which need to be balanced
for overall profitability of the company.
To ensure long-term success, a company’s business portfolio should consist of both
high-growth products in need of cash inputs and low-growth products that generate
excess cash.
The BCG matrix helps to determine priorities in a product portfolio. Its basic
purpose is to invest where there is growth from which the firm can benefit, and
divest those businesses that have low market share and low growth prospects.
Each of the products or business units is plotted on a two-dimensional matrix
consisting of
Relative market share
Market growth rate.
Figure 9.4: The BCG Matrix
High
market
growth Stars Question Marks
rate
Low
market
growth Cash Cows Dogs
rate
High relative Low relative

market share market share
Relative Market Share: Relative market share is defined as the ratio of the
market share of the concerned product or business unit in the industry divided by
the share of the market leader. By this calculation, a relative market share of 1.0
belongs to the market leader.
For example, if market share of 3 businesses A, B, C are
Busines Market
s share
A - 10%
B - 20%
C - 60%
A’s relative market share=10/60=1/6
B’s relative market share=20 /60=1/3
C’s relative market share=60/20=3
The relative market share reflects the firm’s capacity to generate cash. It is
assumed that if a business unit enjoys high market share, its cash earnings would
be correspondingly higher and vice versa.
164 -
Market Growth Rate: It is the percentage of market growth, that is, the percentage by Note
which s
sales of a particular product or business unit have increased.
A high growth rate enables the company to expand its operations. It makes it easier for
the
company to increase its market share and provide the opportunities of profitable
investment.
The company may plough back its earnings into the business and further increase the
rate of
return on the investment. Additional cash will necessarily be required to avail of the
investment
opportunities for growth. On the other hand, low market growth rate indicates stagnation
with
little scope for expansion and profitable investments may be risky to undertake. Increase
in
market share in such a situation can be possible only by cutting into the competitor’s
market
price.
Building the BCG Matrix
The stepwise procedure for building the BCG matrix is given below:
The various activities of the company are classified into different business units or SBUs
The growth rate of the market is determined and plotted on the Y-axis.
The assets employed by the company in each of the business units are compiled to
determine the relative size of the business unit in relation to the company.
The relative market share for different business units is estimated and plotted on
the X-axis
The position of each business unit or product is plotted on a matrix of market growth
rate and relative market share. The size of the business is represented by a circle
with a diameter corresponding to the assets invested in the business. The radius of
the circle is given by
p
r= .R2
where R represents total sales, P represents sales of the business unit as a
percentage of the total sales of the company.
Depending on its location in the 2 × 2 matrix, a separate strategy has to be
developed for each of the units.
It is important not to change the criteria around in order to shift pet projects and
products into more favourable groups, thereby defeating the very purpose of the
exercise.
Analysis of BCG Matrix
The BCG matrix reflects the contribution of the products or business units to its cash
flow. Based on this analysis, the products or business units are classified as:
Stars
Cash cows
Question marks
Dogs
Stars (High Growth, High Market Share)

Stars are products that enjoy a relatively high market share in a strongly growing
market. They are (potentially) profitable and may grow further to become an
important product or category
165
Notes for the company. The firm should focus on and invest in these products or business
units. The general features of stars are:
High growth rate means they need heavy investment
High market share means they have economies of scale and generate large
amounts of cash
But they need more cash than they generate.
The high growth rate will mean that they will need heavy investment and will
therefore be cash users. Overall, the general strategy is to take cash from the cash
cows to fund stars. Cash may also be invested selectively in some problem children
(question marks) to turn them into stars. The other problem children may be milked
or even sold to provide funds elsewhere.
Notes Over the time, all growth may slow down and the stars may eventually
become cash cows. If they cannot hold market share, they may even become dogs.
Cash Cows (Low Growth, High Market Share)
These are the product areas that have high relative market shares but exist in low-
growth markets. The business is mature and it is assumed that lower levels of
investment will be required. On this basis, it is therefore likely that they will be able
to generate both cash and profits. Such profits could then be transferred to support
the stars. The general features of cash cows are:
They generate both cash and profits
The business is mature and needs lower levels of investment
Profits are transferred to support stars/question marks
The danger is that cash cows may become under-supported and begin to lose their
market.
Although the market is no longer growing, the cash cows may have a relatively high
market share and bring in healthy profits. No efforts or investments are necessary
to maintain the status quo. Cash cows may however ultimately become dogs if they
lose the market share.
Question Marks (High Growth, Low Market Share)
Question marks are also called problem children or wild cats. These are products with
low relative market shares in high-growth markets. The high market growth means that
considerable investment may still be required and the low market share will mean that
such products will have difficulty in generating substantial cash. These businesses are
called’ question marks because the organisation must decide whether to strengthen
them or to sell them.
The general features of question marks are:
Their cash needs are high
But their cash generation is low
Organisation must decide whether to strengthen them or sell them.
166 -
Notes
!
Caution Although their market share is relatively small, the market for question
marks is growing rapidly. Investments to create growth may yield big results in the
future, though this is far from certain. Further investigation into how and where to
invest is advised.
Dogs (Low Growth, Low Market Share)
These are products that have low market shares in low-growth businesses. These
products will need low investment but they are unlikely to be major profit earners.
In practice, they may actually absorb cash required to hold their position. They are
often regarded as unattractive for the long term and recommended for disposal.
The general features of dogs are:
They are not profit earners
They absorb cash
They are unattractive and often recommended for disposal.
Turnaround can be one of the strategies to pursue because many dogs have
bounced back and become viable and profitable after asset and cost reduction. The
suggested strategy is to drop or divest the dogs when they are not profitable. If
profitable, do not invest, but make the best out of its current value. This may even
mean selling the division’s operations.
Task Make an analysis of Maruti Suzuki products on the basis of BCG Matrix.
Strategic Implications
The BCG growth-share matrix links the industry growth characteristic with the
company's market share (i.e. competitive strength), and develops a visual display
of the company's market involvement, thereby indirectly indicating current resource
deployment. The underlying logic is that investment is required for growth while
maintaining or building market share. But while doing so, a strong competitive
business i.e. a business having high market share operating in an industry with low
growth rate will provide surplus cash for deployment elsewhere in the corporation.
Thus, growth uses cash whereas market share is a potential source of cash. In
terms of BCG classification, the cash position of various types of businesses can be
visualized as shown Table 9.1.
Table 9.1: Cash Position of Various Businesses
S.No. Business Cash Cash Use Net Cash Balance

Type Source
1. Cow More Less Funds available, so milk and deploy
2. Star More More Build competitive position and grow
3. Dog Less Less Divest or redeploy proceeds
Funds needed to invest selectively to
4. Question Less More improve
Mark competitive position
Thus, in a way, the BCG matrix can be regarded as a pictorial representation of the
sources and uses of funds statement. Market share is considered valuable because
it is a source of profits. Projects are the fruits of accumulated experience giving rise
to cost advantage.
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167
The model assumes that high market growth of star businesses will ultimately slow
Notes down, and
stars may become cash cows, permitting the market leader to take cash out of
them to invest in
other businesses.
However, some of the underlying assumptions of the BCG matrix may not hold good
for some
businesses.
Example: Some electronic appliances and the so-called fashion goods have
very short
life-cycle, whereas staples like bread have very extended life-cycles. The business
may therefore
not follow the typical behaviour pattern assumed by the BCG matrix.
Case Study
BCG at Work in PepsiCo
I t can or
products beservices;
said thateach
PepsiCo products
service and in
operates business portfolio
accordance withcan be dividedalong
its functions in four major
with the
products and services in different areas especially made as a distinction of each division. The
PepsiCo analysis will be based in assessment of the services offered by the
company.
PepsiCo consists of 5 major brands: Gatorade, Quaker, Pepsi products, Frito-Lay
and Tropicana. The products that belong to the question mark are Gatorade and
also Tropicana. Because of the emergence of different healthy drinks and
beverages in the global market, the market share of Tropicana and Gatorade are
being threatened. Although these brands are already established in the
marketplace, the company still needs to have an effective marketing approach to
increase the sale of these brands or brands. Accordingly, question mark category
means that these products have a low share of a possible high growth market and
may become a star product because of the positive response of the customers.
As can be seen in the figure, the services that fall in star category belong to the
Pepsi brands. The star category shows the products with a high share of a gradual
growth of market and these products have a tendency to produce high amount of
profits. The next category that can be seen in the figure is the cash cows. Herein,
the products are considered
Contd...
168 -
to have a high share of a slow growth market. With regards to the PepsiCo, Note
services that s
can be considered in the cash cows are the Quaker. Lastly, it can be seen that
Tropicana,
Gatorade and Frito-Lay are products that can be considered in the dogs' category.
It can be said that PepsiCo has been able to market their products and increase
their
market share and market growth by using different strategies and approaches.
The
company enhances the market share of their brands by considering different
marketing
entry modes. Through collaborative venture PepsiCo has been able to se merger
and
acquisition along with joint venture approach. Furthermore, franchising is another
method
that PepsiCo used to enhance the market share of the brands of the company.
This model
has been utilized by PepsiCo in order to expand its business portfolio in other
regions in
the world. In this manner, the management of PepsiCo considers franchising an
existing
company in an international market while applying the methods of collaborative
venture.
In order to make this foreign operational mode combination a success, PepsiCo
consider
the most suitable and effective expansion strategy. It can be said that the spread
of PepsiCo
is truly global. The company has hundreds of brands, which can be found in
almost 200
countries and territories around the world.
Questions
1. Does every company have all the four categories of the BCG matrix?
What do you suggest to put the question marks of Pepsi in the Cow
2. category? Will
it be feasible for the company? Why/why not?
Source: ivythesis.typepad.com
Ge Nine Cell Matrix
This matrix was developed in 1970s by the General Electric Company with the
assistance of the consulting firm, McKinsey & Co., USA. This is also called GE
Multifactor Portfolio matrix.
Figure 9.5: GE’s Nine Cell Matrix
Business Strength
Strong Average Week
C
A
High
Attractiveness
D
yIndustr
Medium B
Low
169
Strategic
Management
The GE matrix has been developed to overcome the obvious limitations of BCG
Notes matrix. This
matrix consists of nine cells (3 × 3) based on two key variables:
1. Business strength; and
2. Industry attractiveness.
The horizontal axis represents “business strength” and the “vertical axis
represents“, “industry
attractiveness”.
The business strength is measured by considering such factors as:
1. Relative market share
2. Profit margins
3. Ability to compete on price and quality
4. Knowledge of customer and market
5. Competitive strengths and weaknesses
6. Technological capacity
7. Calibre of management
Industry attractiveness is measured considering such factors as:
1. Market size and growth rate
2. Industry profit margin
3. Competitive intensity
4. Economies of scale
5. Technology
6. Social, environmental, legal and human aspects

The individual product-lines or business units are plotted as circles. The area of
each circle is proportionate to industry sales. The pie within the circles represents
the market share of the product line or business unit.
The nine cells of the GE matrix represent various degrees of industry attractiveness
(high, medium or low) and business strength (strong, average and weak). After
plotting each product line or business unit on the nine cell matrix, strategic choices
are made depending on their position in the matrix.
In Figure 9.5, business ‘A’ has strong business strength and has high industry
attractiveness. Such a business has high potential for growth. It deserves expansion
strategies through large investments. Business B has strong business strength, but
medium/low industry attractiveness. Such a business needs a cautious approach.
Business C is weak in business strength though its industry attractiveness is high.
Business D is weak in business strength and also low in attractiveness. Broadly
considered, the company should build business A, maintain business B and make
some hard decisions on what to do with businesses C and D.
170 -
Unit 9: Strategic Analysis and
Choice
Stoplight Strategy Notes
GE matrix is also called “Stoplight” strategy matrix because the three zones are like green,
yellow and red of traffic lights as shown below:
Zone Strategic Choice
Green Invest/expand
Yellow Select /earn
Red harvest/divest
The strategies are chosen depending on the zone in which the product or business
unit happens to fall:
If the product falls in the ‘green zone’, i.e., if the business strength is strong and
industry is at least medium in attractiveness, the strategic decision should be
to expand, to invest and to grow.
If the product falls in the ‘yellow zone’ i.e. if the business strength is low but
industry attractiveness is high, it needs caution and managerial discretion for
making the strategic choice.
If the product falls in the ‘red zone’ i.e. the business strength is average or weak
and attractiveness is also ‘low’ or ‘medium’, the appropriate strategy should
be divestment.
Thus, products or business units in the green zone are almost equivalent to “stars”
or “cash cows”, yellow zone are like ‘question marks’ and red zone are similar to
‘dogs’ in the BCG matrix.
Notes Differences between BCG and GE Matrices
BCG Matrix GE Matrix

1. BCG matrix consists of four cells 1. GE matrix consists of nine cells
2. The business unit is rated against the 2. The business unit is rated against the
following two criteria following criteria
(i) relative market share (i) business strength
(ii) industry growth rate. (ii) industry attractiveness.
The matrix uses single measures to
3. assess 3. The matrix uses multiple measures to
growth and market share. assess business strength and industry
attractiveness
The matrix uses two types of
4. classification 4. The matrix uses three types of
i.e. high and low classification (high/medium/low and
strong /average /weak).
GE matrix overcomes many limitations
5. Has many limitations 5. of
BCG and is an improvement over it.
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171
Notes Critical Assessment of GE Matrix
Merits
The GE matrix is an improvement over BCG matrix in the following respects:
It uses 9 cells instead of 4 cells.
It considers many variables and does not lead to simplistic conclusions.
High/medium/low and strong/average/low classification enables a finer distinction
among business portfolios.
It uses multiple factors to assess industry attractiveness and business strength,
which allow users to select criteria appropriate to their situation.
Shortcomings
The GE matrix, however, has some shortcomings.
It can get quite complicated and cumbersome with the increase in businesses.
Though industry attractiveness and business strength appear to be objective, they
are in reality subjective judgments that may vary from one person to another.
It cannot effectively depict the position of new business units in developing
industries.
It only provides broad strategic prescriptions rather than specifics of business
policy.
Hofer’s Product-market Evolution Matrix
Hofer has suggested a three-by-five matrix in which businesses are plotted

according to two parameters viz. the firm’s business strength (competitive position)
and the industry stage in the product-market life cycle. As in the GE nine-cell
matrix, circles are plotted to represent the size of the industry while market share is
shown as shaded segments.
Figure 9.6: Hofer’s Product/Market Evolution Matrix
Development A
Growth B
Shake out C
Industry Stage
D
Maturity/
Saturation
E
Decline
STRONG AVERAGE WEAK

COMPETITIVE POSITION
172 -
Five businesses have been shown in the above Figure 9.6. The key strategies that Note
emerge are s
briefly explained below.
Business A represents a product/market that has a high potential and deserves
expansion
strategies through large investments. Business B has a strong competitive position but
has a
product that is entering the shake-out stage and, therefore, needs a cautious expansion
strategy.
Business C is probably a ‘dog’ while D represents a business which can be used for cash
generation
that could be diverted to A and B. Business E is a potential loser and may be considered
for
divestment. In this manner, the product/market evolution matrix portrays a company’s
corporate
portfolio with a high level of accuracy and completeness.
Directional Policy Matrix (DPM)
This matrix was developed by Shell Chemicals, UK. It uses two dimensions- viz.
“business sector prospects and the “company’s competitive capabilities”. Business
sectors prospects are divided into attractive, average and unattractive; and
company’s competitive capabilities into strong, average and weak, as shown in the
following Figure 9.7. This gives a 9-cell matrix.
Figure 9.7: Directional Policy Matrix
Based on the two dimensions, businesses fall into Nine quadrants. The strategy to
be followed for businesses in each quadrant are explained below.
Divestment
Both competitive capabilities and business prospects of the business units are
weak. Loss making units with uncertain cash flows fall in this quadrant. Since the
situation is not likely to improve in the near future, these businesses should be
divested. The resources released could be put to an alternative use.
Phased Withdrawal
Here the SBU is in an average to weak competitive position in the low growth
unattractive business, with very little chance of generating enough cash flows.
Gradual withdrawal from such SBUs is the strategy to be followed. The cash
released can be invested in more profitable ventures.
-
173
Strategic
Management
Notes Double or Quit
Though business prospects look attractive here the company’s competitive

capabilities are weak. Either invest more to exploit the prospects or, if not possible,
better “exit” from the SBU.
Phased Withdrawal
Already covered in previous page.
Custodial
Here both competitive capabilities and business prospects are unattractive or

average. Bear with the situation with a little bit of help from the other product
divisions or get out of the SBU so as to focus more on other attractive businesses.
Try Harder
Here business prospects are attractive, but competitive capabilities are average;
strengthen their capabilities with infusion of additional resources.
Cash Generation
Here the SBU has strong competitive capabilities, but its business prospects are
unattractive. Its operations can be continued at least for generating cash flows and
profits. However, further investments cannot be made in view of unattractive
business prospects.
Growth
Here the SBU has strong competitive capabilities, but its business prospects are
average. This SBU requires additional infusion of funds. This would help the SBU to
grow.
Market Leadership
Here the SBU has strong capabilities, and its business prospects are also attractive.
It must receive top priority so that the SBU can retain its market leadership.
Arthur D Little Portfolio Matrix (ADL)
Arthur D Little Company’s matrix links the stages of the product life cycle with the
business strength. On the vertical axis, businesses are classified with respect to
their business strength as weak, tenable, favoured, strong or dominant. Along the
horizontal axis, four steps in the product life cycle, i.e. embryonic, growth, mature
and decline are marked. This makes a four-by-five matrix as shown in the Figure
9.8.
174 -
Note
Figure 9.8: Arthur D Little Portfolio Matrix (ADL) s
The strategic approach would naturally vary according to the position of the
business with respect to its business strength (competitive strength) and the stage
in the product life cycle. Thus, the strategy should be to invest in a business which
is in embryonic or growth stage provided it has favorable or strong business
strength. The “BUILD” strategy is recommended for such a business unit. But
“HOLD” strategy is suggested for businesses whose products are in maturity stage
even though it has favourable, strong or dominant business strength. For business
with products in the decline stage and having a strong or dominant business
strength, “HARVEST’ strategy is suggested. If the business is in maturity stage, but
having weak business strength, “DIVEST” strategy is called for. This is so because
any business having weak business strength will have poor return on investment,
and hence divestment strategy will be the preferred strategy.
Profit Impact of Market Strategy (PIMS)
PIMS was invented by General Electric in the 1960s to examine which strategic
factors most influence cash flows and the investment needs and success. PIMS
model is based on analysis of data presented by companies to derive general laws.
Actually, the model uses statistical relationships derived from the past experience
of companies. Typically, the Strategic Planning Institute develops an industry
characteristic, using multi-dimensional cross sectional regression studies of the
profitability of more than 2000 companies. The industry characteristic is compared
with performance in the concerned company so as to find the clue to appropriate
strategic approaches. The model is characterized by scientific objectivity but it
involves analysis of relationship that is based on heterogeneity of business and
time periods.
PIMS, of course, has certain inherent drawbacks. It assumes that short-term
profitability is the primary goal of the firm. The analysis is based on the historical
data and the model does not take note of further changes in the company’s
external environment.
The model cannot take account of internal-dependencies and potential synergy
within organisations. Each firm is examined in isolation.
-
175
Notes SPACE Matrix
The Strategic Position and Action Evaluation (SPACE) matrix is another important
technique. It reveals which of the following strategies is most appropriate for an
organisation:
Aggressive strategies
Conservative strategies
Defensive strategies
Competitive strategies
Figure 9.9: The SPACE Matrix
Financial
Strength
Y-axis
Conservative Aggressive
Competitive X-axis Industry
Strengt
Advantage h
Defensive Competitive
Environment Stability
The axes of the space matrix represent two internal dimensions, namely, financial
strength and competitive advantage and two external dimensions, namely,
environmental stability and industry strengths, as shown in the Figure 9.9.
The directional vector of each profile indicates the type of strategies to pursue:
conservative, aggressive, defensive or competitive.
Aggressive Quadrant
When a firm’s directional vector falls in the “aggressive quadrant” of the matrix. It
is in an excellent position to use its internal strength to:
take advantage of external opportunities
overcome internal weaknesses
avoid or minimize external threats
The firm can adopt any of the aggressive growth strategies like market penetration,
market development, product development, backward and forward integration,
horizontal integration, concentric and conglomerate diversification or a combination
strategy.
Conservative Quadrant
When a firm’s directional vector falls in the “conservative quadrant”, it means the
firm should stay close to its core competencies and not take excessive risks.
Conservative strategies include market penetration, market development, product
development and concentric diversification.
Defensive Quadrant
When the directional vector falls in the “defensive quadrant”, it suggests that the
firm should focus on rectifying internal weaknesses and external threats, through
defensive strategies. Defensive strategies or retrenchment strategies include
turnaround, divestiture, bankruptcy or liquidation.
176 -
Competitive Quadrant Notes
When a directional vector falls in the “competitive quadrant”, the firm should follow
competitive strategies, which include backward, forward, and horizontal integration,
market penetration; market development, product development, joint ventures and
strategic alliances.
Task Discuss the space matrix for McDonalds and Wal-Mart.
Quantitative Strategic Planning Matrix (QSPM)
The basic format of QSPM is as follows:
Table 9.2: Basic Format of QSPM
Key Factors Weight Strategy 1 Strategy 2 Strategy 3

Key external factors
Economic
Political, legal and governmental
Social, cultural and demographic
Technological
Competitive
Key internal factors
Management
Marketing
Finance
Production
HR
R&D
The QSPM is a tool that allows strategists to evaluate alternative strategies

objectively, based on key internal and external success factors. Like other analytical
tools, QSPM requires good intuitive judgment.
The six steps required to develop a QSPM are:
Step 1: Make a list of the firm’s external opportunities/threats and internal
strengths/ weaknesses.
Step 2: Assign weights to each key factor.
Step 3: Identify alternative strategies that the organisation wants to pursue.
Step 4: Determine the attractiveness scores. They are numerical values that
indicate the relative attractiveness of each strategy in a given set of
strategies.
Step 5: Compute the total attractiveness scores, which are obtained by multiplying
the weights by the attractiveness scores in each row.
Step 6: Compute the sum total attractiveness scores in each strategy column of QPSM.
The sum total attractiveness scores reveal which strategy is most attractive.
9.5 Contingency Strategies
Strategic choice is made on the basis of certain assumptions and conditions. If the
conditions change drastically, the chosen strategies may have to be discarded
altogether. If they are not too radical, the strategies may have to be modified suitably.
But changes do not occur in a sequential
-
177
Notes order, nor do they give any impending warnings. They surface suddenly leaving
deep scars on
the faces of managers—if they are unprepared. To be on the safe side, strategists
always keep
contingency strategies ready. Such contingency strategies are formulated in advance to
take care
of unknown events and unexpected challengers. As rightly summarised by Peter
Drucker,
successful managers do not wait for future. They make the future through their proactive planning
and advanced preparation. They introduce original action by removing present
difficulties,
anticipate future problems, change the goals to suit internal and external changes,
experiment
with creative ideas and take initiative, attempt to shape the future and create a
more desirable
environment.
The contingencies could come in the form of a labour strike, a downturn in the
economy or an
overnight change in government policy. Once such scenarios are identified
managers could
come out with alternative strategies for the firm. Firms using this kind of strategy
identify
certain trigger points to alert management that a contingency strategy should be
pressed into
service. When alternative plans are put in place, mid-course corrections could be
carried out in
a smooth way.
Caselet TVS-Suzuki: The Third Coming
W hen thetotechnology partner, Suzuki

put all its expansion plans parted ways burner
in the back with TVS Motors
and Ltd,its
overhaul
in the two-wheelers segment. Strict emission norms, too,
the TVS Group
product had
portfolio
have made its life somewhat uneasy, forcing the company to abandon the
two-stroke technology in favour of the now popular four-stroke technology in
motor cycle (VICTOR, Fiero). Though TVS Motors is a late entrant in the 4-
stroke motor cycle segment it has been able to recover lost ground in recent
years because the group had enough R&D muscle to develop the 4-stroke
technology and is purely a power-bike manufacturer. The success of TVS
Victor, India’s first fully indigenous four-stroke motorcycle, is a shining
example of proactive planning and years of hard mental preparation to take
care of any eventuality. The important lesson to be learnt from such
unexpected events is, quite well known in corporate circles, but worth
repeating here: Never rest on past laurels.
Source: Business Today, July 6, 2001; September 10 2001; December 6, 2000
9.6 Summary
Strategic choice is the decision to select from among the alternatives

considered, the strategy which will best meet the enterprise objectives. This
decision-making process consists of four distinct steps:
Focusing on a few alternatives.
Considering the selection factors.
Evaluating the alternatives.
Making the actual choice.
Strategic analysis framework consists of three stages: Input stage, Matching
stage and
Decision stage
178 -
The basic purpose of industry analysis is to assess the strengths and weaknesses of Note
a firm s
relative to its competitors in the industry.
Portfolio analysis is an analytical tool which views a corporation as a basket or
portfolio
of products or business units to be managed for the best possible returns, and help
a
corporate to build a multi-business strategy.
Various matrices are used under this approach.

Though the portfolio approaches have limitations, but all these limitations can be
overcome
through effective strategy development and meticulous planning.
While the core competence concept appealed powerfully to companies disillusioned
with
diversification, it did not offer any practical guidelines for developing corporate-
level
strategy.
Contingency plans are organised and coordinated set of steps to be taken if an
emergency
or disaster (fire, hurricane, injury, robbery, etc.) strikes.
9.7 Keywords
BCG Matrix: Most popular and the simplest matrix to describe a corporation’s
portfolio of businesses or products.
Display Matrices: Frameworks in which products or business units are displayed
as a series of investments from which top management expects a profitable return.
Market Growth Rate: The percentage of market growth, that is, the percentage
by which sales of a particular product or business unit have increased.
Portfolio strategy approach: A method of analysing an organisation’s mix of
business in terms of both individual and collective contributions to strategic goals.
Relative Market Share: The ratio of the market share of the concerned product or
business unit in the industry divided by the share of the market leader.
Strategic Choice: Selection of a strategy that will best meet the firm’s objectives.
9.8 Self Assessment
Fill in the blanks:

The balancing of the portfolio implies that though individual businesses grow,
mature and decline, yet the company continues to ..................
The GE matrix has been developed to overcome the obvious limitations of .................
In GE Matrix, the horizontal axis represents ................. and the vertical axis represents
.................
GE matrix is also called ................. strategy matrix.
Directional Policy Matrix (DPM) was developed by .................
Arthur D Little Company's matrix links the stages of the product life cycle with the
.................
On the vertical axis in Arthur D Little Company's matrix, businesses are classified with
respect to their business strength as ................., ................., ................., ................. or .................
-
179
The axes of the space matrix represent two internal dimensions,

Notes 8. namely, ................. and
.................
The axes of the space matrix represent two external dimensions,
9. namely, ................. and
.................
10. BCG matrix is also called the .................

The BCG matrix helps to in a product
11. determine ................. portfolio.
A high growth rate enables the company
12. to ................. its operations.
9. Review
9 Questions
Suppose you are the head of a garments making firm that has just started its
operations in India. Discuss the process of strategic choice that you are most
likely to follow.
Conduct an industry analysis for the Indian automobile industry.
Analyse the main advantages of portfolio analysis? Why it is a good option for multi-
product organisations?
Through examples, prove that some of the underlying assumptions of the BCG
matrix may not hold good for some businesses.
Compare and contrast the General Electric Grid and the BCG Matrix?
Do you think, BCG Matrix has limited application? Justify your answer.
Though BCG matrix can be very helpful in forcing decisions in managing a portfolio
of products, it cannot be employed as the sole means of determining
strategies for a portfolio of products. Do you agree with this statement or not?
Why?
On the basis of GE Matrix, make an analysis of banking company of your choice.
Analyse the main issues which have to be taken care of while formulating a multi
business strategy.
Do you think it is possible to sustain over a long run without formulating multi
business strategy? Why/ why not?
1. grow 2. BCG matrix

business strength, industry attractiveness
4. Stoplight 5. Shell Chemicals, UK

weak, tenable, favoured, strong,
6. business strength 7. dominant
financial strength, competitive advantage
environmental stability, industry strengths
10. Growth share matrix 11. priorities
expand
180 -
Notes
Books Richard Lynch, Corporate Strategy, Prentice Hall, Pearson Education

Ltd., UK, 2006.
R. Srinivasan, Strategic Management, Prentice Hall of India, New Delhi,
2005.
Online links
www.marketingteacher.com/Lessons/lesson_a_d_little
www.netmba.com/strategy/matrix/bcg
www.valuebasedmanagement.net/methods_ge_mckinsey
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181
Notes
Unit 10: Strategy Implementation
CONTENTS
Objectives
Introduction
Activating Strategies
Nature of Strategy Implementation
Barriers and Issues in Strategy Implementation
Model for Strategy Implementation
Resource Allocation
23 Importance of Resource Allocation
24 Managing Resource Conflict
25 Criteria for Resource Allocation Process
26 Factors affecting Resource Allocation
27 Difficulties in Resource Allocation
Summary
Keywords
Self Assessment
Review Questions
Further Readings
Objectives

Explain how strategies are activated
State the nature and barriers in strategy implementation
Discuss the model of strategy implementation
Describe the concept of resource allocation
Introduction
Strategy implementation is the process of putting organisation’s various strategies into

action by setting annual or short-term objectives, allocating resources, developing
programmes, policies, structures, functional strategies etc. Even the best strategic plan
will be useless unless it is implemented properly. The strategy implementation is,
therefore, the most difficult element of
182 -
the strategic management process. This is so because there has to be a “fit” between the strategy Notes
and the organisation.
10.1 Activating Strategies
There is no guarantee that a well designed strategy is likely to be approved and

implemented automatically. The strategic leader must, therefore, defend the
strategy from every angle, communicate how the strategy when implemented
would benefit the whole organisation and secure the wholehearted support of
employees working at various levels. To keep things on track, he can list out
priorities, programme implementation process, budgets, etc. on paper so that
nothing is left to chance.
While giving a concrete shape to the strategy, he should also take note of
regulatory mechanisms that govern business activity and see that everything is in
order. Some of the important things to be kept in mind are listed below:
Formation of a company: This must be in line with provisions of the Companies
Act, 1956, covering issues such as formation of a company, its registration,
obtaining suitable licenses before commencing operations, raising funds from
various sources in accordance with the provisions of SEBI Act, 1992.
Operations of a company: The company must compete in a fair way and earn
the profits through legally blessed routes only observing the (a) provisions of
competition law; (b) Import/export restrictions, (c) FERA regulations (FEMA
regulations, 2000); (d) Patent, trademark, copyright (Indian Patents Act 1995,
The Trade and Merchandise Marks Act 1958, The Copyrights Act 1957 etc.)
stipulations; (e) Labour Laws (regarding employment of women, children,
payment of wages, providing welfare amenities, keeping healthy industrial
relations etc.); (f) environmental protection (The Environment Protection Act
1986), (g) pollution control requirements; (h) consumer protection measures
etc.
Winding up operations: Even when the company decides to get out of a
venture/business, the rules of the game need to be followed scrupulously
(whether in offering golden handshake to employees or asking all the
employees to quit in one go).
After the institutionalisation of strategy in the above manner, action plans could be
formulated. These are basically functional level strategies undertaken at the
departmental level and usually deal with operational aspects of a strategy. The
action plans, however, must try to translate the overall strategic plan in letter and
spirit without any deviations. Issues like who will do what, what kind of support is
required at various stages, what kind of privities have to be fixed while
implementing active plans, how does a particular active plan contribute to the
broad objectives of the strategy etc. must also be carefully looked into. Once the
action plans are ready, the strategist must resolve issues relating to allocation of
scarce resources over the entire organisation.
10.2 Nature of Strategy Implementation
A successful strategy formulation does not guarantee successful strategy

implementation. It affects an organisation from top to bottom; it affects all
divisional and functional areas of business. It requires the right alignment between
the strategy and various activities, processes within the organisation.
The complexities in the task of implementation arise from a number of
organisational adjustments that are required over an extended period of time and
the need to match them all to the strategy. Key people need to be added or
reassigned, resources have to be mobilised and allocated, functional strategies and
policies are to be designed, organisational structure may
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183
have to be changed, a strategy- supportive culture may have to be developed,

Notes reward and
incentive plans are to be revised and if necessary, restructuring, re-engineering and
redesigning
becomes imperative. In short, the difficulties in affecting the organisational
adjustments arise
from the tasks associated with change. The success of strategy implementation, to a
large extent,
therefore, depends on the way the task of change management is carried out.
Though both the formulation and implementation are inextricably linked, they can
be
distinguished as follows (Fred R. David):
Strategy formulation Strategy implementation

Positioning forces before the action. Managing forces during the action.
Focuses on effectiveness. Focuses on efficiency.
Primarily an intellectual process. Primarily an operational process.
Requires good intuitive and analytical Requires motivation and leadership
skills. skills.
Requires coordination among few Requires coordination among many
individuals individuals.
Implementation moves responsibility from the corporate level to operational levels.

This shift in responsibility from strategists to divisional, functional and operational
managers may cause implementation problems especially when strategic decisions
come as a surprise to middle and lower-level managers. Therefore, strategic
decisions must be communicated and understood throughout the organisation. It is
also essential that divisional and functional managers be involved as much as
possible in strategy formulation activities and, likewise strategists be involved in
strategy implementation activities.
Case Study
Cost Reduction Strategy at Bajaj
Bajaj competition
Auto is India’s
frombiggest
some ofscooter and motorcycle
the world’s manufacturer,
leading scooter yet itmanufacturers.
and motorcycle
This case explores how it was using supplier strategies to reduce its
faces intense
costs and remain competitive.

In 1998, Bajaj Auto – India’s biggest scooter and motorcycle manufacturer –
was struggling to shake off a strong challenge from Honda, Suzuki and Piaggio
in its home market. The family-owned company, which lacks the technological
resources of its competitors, had to compensate by watching its expenses. Its
aim is to remain the lowest cost producer in the world.
But no matter how hard Bajaj tries to control costs and improve productivity at
its plants near Pune, in West India, the incremental savings were meager. This
is because most of the costs are incurred before the components enter Bajaj’s
factory gates. In-house costs make up only about 10 to 12% of the sales price.
Advertising and distribution costs account for a further 3 to 4%. By contrast,
‘about 65% of the sales price comes from costs outside Bajaj’s direct control.
This can rise to 75% for new models. Bajaj has recently realised that further
big cost savings are more likely to come from its suppliers than from the
manufacturing process.
Contd...
184 -
Note
GM Style Supplier Management s
Sanjiv Bajaj is heading an effort to introduce US-style supply chain

management, using General Motors as a model. It is a task for which he is well
suited. A trained engineer, he went into the finance department because his
elder brother, Rajiv, had already been groomed to take over the core
manufacturing responsibilities. Engineering expertise helps him to understand
where costs can be trimmed. Bajaj, which produces 1.3 million vehicles a year,
has about 900 direct tier-1 suppliers. According to the GM model, it should
have 80. Many of them are small, low-technology, family-run businesses with
poor productivity and slack quality control.
‘We need to identify who the good vendors are, reduce the number of vendors
and give them a bigger share of the pie,’ says Sanjiv Bajaj. Then, he adds, the
company will try to negotiate lower prices for higher volumes. As in the case
of GM, Bajaj hopes to work with its suppliers to improve ‘quality and
reliability’. The company aims to help its chosen suppliers invest in new
equipment and improve productivity over the long term, bearing in mind ‘our
future requirements’.
Bajaj has followed GM principles by dividing its suppliers into different
categories: those that own specialist knowledge and provide it in the form of
proprietary items such as headlamps; those that provide model design parts
on the basis of knowledge passed on by Bajaj; those that provide basic nuts
and bolts hardware; and non-core product suppliers. It has also set out four
issues to be looked at with its suppliers: the ‘make-or-buy’ decisions that
determine which products a customer buys; issues pertinent to each
component sector; a vendor rating system; a vendor integration programme
to introduce quality control systems used by Bajaj to its suppliers.
Difficulties with Applying US-style Strategy
But this is where the similarity with GM ends. “You can’t use textbook
theories,” says Sanjiv Bajaj. ‘In India you have to consider questions like
labour and power supply.’ Unlike GM, Bajaj cannot afford to rely on only one
supplier for a particular part because its operations would be paralysed if that
supplier’s workers went on strike – a common occurrence in India’s highly
unionised manufacturing industry. Similarly, having just one supplier would be
risky because its output could be disrupted by power shortages, another
regular occurrence. It makes sense to have suppliers in different areas, since
simultaneous power failures are less likely.
Bajaj also has to wrestle with problems such as India’s poor road system,
which affects distribution and makes location important. Few Indian suppliers
could shoulder the responsibilities GM puts on its US suppliers. There are also
issues that relate specifically to components. “Two of our three suppliers of
shock absorbers are subsidiaries of competitors,” says Sanjiv Bajaj. “Long
term this is questionable.” The company may opt to build up a third supplier in
a relationship of ‘interdependence’.
Rationalising the supply chain will take several years. When it is completed,
Bajaj will still have far more suppliers than the GM model suggests it should.
Sanjiv Bajaj talks of ‘200, 300 or 400’, though he says the company will decide
the final figure ‘from the bottom up’.
Bajaj hopes this will produce cost savings and quality improvements that will
help compete against world-class products in an increasingly discerning
market. It remains to be seen whether this will be enough. Bajaj will also have
to match Honda and its other rivals in design, engine technology and
marketing. But better management of its suppliers, while not guaranteeing
success, is likely to be a necessary requirement for it.
Contd...
-
185
Notes Progress to 2005

By 2005, Bajaj Auto was well established as a major motorcycle manufacturer
in India. It had created a major manufacturing facility at its base in Pune. It
had developed a strong distribution and service network and an important
R&D facility, which had led to the introduction of new Digital Twin Spark
Ignition Technology. The company had also become a major exporter of
motorcycles in the Asian region and was negotiating to set up a manufacturing
facility in Indonesia. Although not mentioned in the case above, the company
had an important line of vehicles – Bajaj was the leading company in the
Indian three-wheeler market and had a profitable revenue stream from this
market segment.
However, Bajaj Auto had lost its market leadership in motor cycles to a rival
company, Hero Honda. This was partly as a result of having little success in
launching successful models into the fast-growing executive segment of the
Indian motor cycle market, where Hero Honda was the market leader. Bajaj
was still engaged in a fierce price war with Hero Honda in the standard market
segment where low production costs were crucial to profitability. In addition,
the original Japanese motorcycle company, Honda, had entered the Indian
market in 2004 as a new threat to both Hero Honda and Bajaj.
Finally, Bajaj was so pleased with the overall performance of Mr Rajiv Bajaj
that it appointed him as managing director of the group in 2005. He had
delivered a major transformation in the group’s fortunes over the period from
1998 and was well positioned to take the group forward.
Questions
What are the main problems facing Bajaj Auto? To what extent are they related
to operations issues?
Is it possible or even realistic to employ US-style operations strategies in a
country where the suppliers present rather different problems from those
experienced in the US?
Can you think of any other options to assist Bajaj develop its strategy beyond
supply chain issues?
What lessons can companies draw from the experience of Bajaj on the
application of the strategic issues?
10.3 Barriers and Issues in Strategy Implementation
Management must keep in mind the following key issues that arise in implementing
strategy and how empowering systems might relate to such issues.
Time Horizon: Such systems have both long-term and short-term dimensions. For
example, rewards like productivity bonus should be based on quantitative
measures of performance related to the short-term. On the other hand, it is
appropriate to link long-term rewards with qualitative measures and a few
relevant quantitative measures.
Risk Considerations: When risk-prone behaviour is desired, qualitative measures
of performance may be more beneficial, for example, rewards like bonus or
stock options. This is because quantitative measures may lead to risk-averse
behaviour to avoid failure rather than risk prone behaviour to achieve results.
186 -
3. Bases of Individual Rewards: Reward systems should be linked to an individual’s capability,

Notes effort and job satisfaction. If rewards are geared to only one aspect, it may have a
negative
effect on performance in other aspects.
Bases of Group Rewards: An important issue in reward systems is whether to
have individual rewards or group rewards. Rewarding individuals for effort and
performance may be difficult unless the organisational structure permits
individual performance to be isolated from that of others. Thus, for example,
with respect to managerial contribution to corporate performance, individual
rewards may be beneficial and appropriate because individual’s contribution is
relatively independent of others. On the other hand, if individual’s
contributions are relatively interdependent, it would be appropriate to adopt
schemes based on group performance. Again, rewarding individuals may be
necessary where entrepreneurial or creative behaviours are sought to be
encouraged. On the contrary, if greater co-operation and team work is sought
to be rewarded, group reward schemes would be more desirable.
Corporate and SBU Perspectives: In multi-divisional organisations, reward
systems with a balanced approach towards corporate interests and the
interests of the Strategic Business Units (SBUs) should be designed, where
business units have greater autonomy and independence. Likewise, if the
SBUs are not likely to influence corporate performance, unit-based reward
schemes would be more beneficial. But in the case of directors and general
managers, placed in the units, who have dual responsibility of achieving unit
as well as corporate objectives, due care must be taken to design balanced
empowering environment.
Task Recently ITC has launched its range of noodles –Sunfeast Yippee. The noodles
come in different flavours and shape and they are trying to position the product
based on these distinguishing features. Considering that the market is dominated
by Nestlé’s Maggi, identify the barriers they might face in the implementation of
their strategy.
10.4 Model for Strategy Implementation
According to Steiner and Miner, “the implementation of policies and strategies is

concerned with the design and management of systems to achieve the best
integration of people, structures, processes and resources in reaching
organisational purposes”. Implementation of strategy therefore involves a number
of interrelated decisions, choices, and a broad range of activities. It requires an
integration of people, structures, processes etc.
Mc Kinsey’s 7-S model is good at capturing the importance of all these elements in
the implementation of strategy.
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187
Notes The 7-S framework was developed in 1970s by the well-known consultancy firm, the
Mc Kinsey Company of the United States. The 7-S framework is illustrated:
Structure
Strateg System
y s
Shared
Values
Skills Style
Staff
The purpose of the model is to show the interrelationship between different

elements of an organisation, and the need to bring them together.
7-S Framework
This framework basically deals with organisational change. The main thrust of
change is not connected only with the organisation’s strategy. It has to be
understood by the complex relationships that exist between strategy, structure,
systems, style, staff, skills and super-ordinate goals. These are called the 7-S
of the organisation.
The 7-S framework suggests that there are several factors that influence an
organisation’s ability to change. The variables involved are interconnected so that
altering one element may well impact other connected elements. Hence, significant
changes cannot be achieved in any variable without making changes in all the
variables. There is no starting point or implied hierarchy in the shape of the
diagram, so it is not obvious which of the 7 factors would be the driving force in
changing a particular organisation at a particular point of time. All the elements are
equally important. The critical variables of change could be different across
organisations. They could also be different in the same organisation.
Fundamentally, the framework makes the point that effective strategy
implementation is more than an individual subject, but is coupled with skills, styles,
structures, systems, staff and super-ordinate goals.
Super-ordinate Goals: “Super-ordinate goals” mean the “goals of a higher order
which express the values, vision and mission that senior management brings to the
organisation”.
These can be considered as the fundamental ideas around which a business is built.
Hence, they represent the main values and aspirations of an organisation. They are
the broad notions of future direction. They can be considered to be equivalent to
“organisational purposes”. For example, the super-ordinate goal of IBM has been
“customer service”, while that of Hewlett-Packard was “innovative people at all
levels in the organisation”. When properly articulated, super-ordinate goals can
provide a strong basis for organisation’s stability in a rapidly changing environment
by providing a basic meaning to people working for the organisation.
188 -
Structure: “Structure” means the organisational structure of the company. The design Note
of s
organisational structure is a critical task of top management. Organisational structure
refers to
the relatively more durable organisational arrangements and relationships. It prescribes
the
formal relationships among various positions and activities, communication channels,
roles to
be performed by various members of an organisation.
Organisational structure performs four major functions:
It reduces external uncertainty.
It reduces internal uncertainty due to variable, unpredictable and random human behaviour.
It provides a wide variety of devices like departmentalization, specialization,
division of labour, delegation of authority etc.
It helps in coordinating various activities of the organisation and focus on its objectives.
Organisational structure must be designed in accordance with the needs of the
strategy. According to Chandler, structure must follow strategy. In other words,
changes in strategy must be followed by changes in organisational structure.
According to McKinsey, the relationship between strategy and structure, though
important, rarely provides unique structural solutions. Quite often the main problem
in strategy relates to its execution.
Systems: “Systems” mean the procedures that make the organisation work. They
include the rules, regulations and procedures, both formal and informal, that
complement the organisational structure. Systems include production planning and
control systems, cost accounting procedures, capital budgeting systems,
performance evaluation systems etc. Often, changes in strategy require changes in
systems.
Style: “Style” means the way the company conducts its business. Top managers in
organisations can use style to bring about change. Organisations differ from each other
in their “styles” of working. The style of an organisation, according to the McKinsey
framework, becomes evident through the patterns of actions taken by the top
management team over a period of time.
Thus, an important part of managing change is establishing and nurturing a good
‘fit’ between culture and strategy.
Staff: “Staff” refers to the pool of people who need to be developed, challenged
and encouraged. It should be ensured that the staff has the potential to contribute
to the achievement of goals. Three important aspects about staff are:
Selecting meritorious people for specific organisational positions.
Developing abilities and skills in them, to take up challenging assignments.
Motivating them to give their best to achieve strategic goals.
Skills: “Skills” are the most crucial attributes or capabilities of an organisation.
Skills in the 7-S framework can be considered as an equivalent of “distinctive
competencies”. For example, Hindustan Lever is known for its marketing skills,
TELCO for its engineering skills, IBM for its customer service, Du Pont for its
research and development skills and Sony for its new product development skills.
Skills are developed over a period of time and are a result of a number of factors.
Hence, to implement a new strategy, it is necessary to build new skills.
Strategy: “Strategy” is the long-term direction and scope of an organisation. It is
the route that the company has chosen to achieve competitive success.
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189
Strategic
Management
Notes Alignment of the Framework
Successful implementation of strategy requires the right alignment of different

elements within the organisation. The Mc Kinsey consultants call strategy, structure,
and systems as the “hard elements” of the organisation and the other 4 Ss i.e.
style, skills, staff and super-ordinate goals as the
“soft elements” of the organisation. The hard elements are more tangible and
definite, and so they are often the ones that gain the greater attention, however,
the soft elements are equally important, even if they are less easy to measure,
assess and plan.
Merits of 7-S Framework
The virtue of 7-S framework is that it highlights some important organisational

interconnections and their role in affecting change. It illustrates, in a simple way, that
the real task of implementing strategy is one of bringing all 7-Ss into harmony. When the
7-S are in good alignment, an organisation is poised and energized to execute strategy
to the best of its ability.
Secondly, the Mc Kinsey’s model provides a convenient checklist for judging
whether an organisation is ripe for implementing strategy. It also helps in
diagnosing why the results emanating from the implementation of a strategy fall
short of expectations and therefore, what new ‘fits’ would be required.
Thirdly, the framework also helps strategists in evaluating their organisations along
each of the seven dimensions, thereby identifying organisational strengths and
weaknesses.
Finally, Mc Kinsey’s 7-S framework is a powerful expository tool. However, it should
be remembered that changing the organisational elements is not an easy task. But
that should not stop one from striving to bring about change.
Limitations of 7-S Framework
The 7-S framework shows that relationships exist and it provides some limited clues
as to what constitutes more effective strategy implementation. Beyond this,
however, it is not precise. For example, the framework says little about the how and
why of interrelationships. The model is therefore poor at explaining the logic and
methodology in developing the links between the elements.
A further weakness is that the framework does not highlight or emphasize other
areas that have subsequently been identified as being important for strategy. Those
areas are:
Innovation
Knowledge
Customer-driven service
Quality
The above elements are equally important for any organisation to succeed.
In spite of the above limitations, the 7-S framework provides a way of examining
the organisation and what contributes to its success. It is good at capturing the
importance of the links between the various elements. That is why Mc Kinsey
consultants used it as a starting point for their search for more detailed
interconnections.
190 -
Notes
10.5 Resource Allocation
Most strategies need resources to be allocated to them if they are to be implemented
successfully. Let us examine some special circumstances that may affect the allocation
of resources.
Resource allocation deals with the procurement and commitment of financial,
physical and human resources to strategic tasks for achievement of organisational
objectives. This involves the process of providing resources to particular business
units, divisions, functions etc for the purpose of implementing strategies. All
organisations have at least five types of resources:
Physical Resources
Financial Resources
Human Resources
Technological Resources
Intellectual Resources
These resources may already exist in the organisation or may have to be acquired.
Resource allocation decisions are very critical in that they set the operative
strategy for the firm. Resource allocation decisions about how much to invest in
which areas of business reinforce the strategy and commit the organisation to the
chosen strategy.
10.5.1 Importance of Resource Allocation
A company’s ability to acquire sufficient resources needed to support new strategic

initiatives and steer them to the appropriate organisational units has a major
impact on the strategy implementation process. Too little funding arising from
constrained financial resources or from sluggish management action slows progress
and impedes the efforts of organisational units to execute their part of the strategic
plan effectively.
At the same time, too much funding wastes organisational resources and reduces
financial performance. Both these extremes emphasize the need for managers to
be careful about resource allocation. Resource allocation becomes a critically
important exercise when there are major shifts from the past strategies in terms of
product/market scope. For example, if the firm’s strategy is expansion in one line,
withdrawal from another and stability in the rest of the products, then greater
resources will have to flow to the first and lesser to the second and the third.
Similarly, if the strategy is to develop competitive edge through product
development, greater resources will have to be committed to R&D.
Resource allocation is a powerful means of communicating the strategy in the
organisation as it gives the signals to all concerned. It will demonstrate what
strategy is really in operation.
Resource allocation decisions should be taken judiciously because using a formula
approach (i.e. allocating funds as a percentage of sales or profits), may be
inappropriate and counter-productive. Care should be taken to see that the
resources are not allocated or withdrawn because of easy availability or paucity.
Example: Cutting down R&D budget in view of sudden fall of profitability

should be avoided as such expenditure may be most critical for developing future
competitive advantage.
The resource allocation decisions are generally linked to the objectives. For
example, decision about dividend payment is linked to the ability of the company to
attract capital. How to distribute the expected profits among investors, employees
and the company’s own needs is an important resource allocation decision from the
viewpoint of long-term implications of the strategy.
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191
Notes
Notes Broadly, there are three approaches to resource allocation:
Top-down approach
Bottom-up approach
Strategic budgeting
Top-Down approach: In this approach, resources are allocated through a
process of segregation down to the operating levels. The Board of
Directors, the Managing Director or members of top management
typically decide the requirements of each subunit and distribute
resources accordingly.
Bottom-up approach: In this approach, resources are distributed through a
process of aggregation from the operating level. The operating levels
work out the requirements of each subunit and the resources are
allocated accordingly.
Strategic budgeting: This approach is a mix of the above two approaches, and
involves an interactive form of decision-making between different levels of
management.
10.5.2 Managing Resource Conflict
The common approach to resource allocation is through budgetary system. There

are however, many other tools, which can be used for this purpose. Some of the
important tools used for resource allocation are discussed below:
BCG Matrix
The BCG matrix, which is generally used for portfolio analysis, can also be used as a
guideline for resource allocation. The surplus resources from “cash cows” can be
reallocated to “stars” or “question marks”. In so far as businesses categorized as
“dogs” are concerned, with low growth and low market share, they may not need
any thrust, and resources can be gradually withdrawn from such businesses and
invested in other promising businesses.
The BCG matrix is a useful tool because it impresses upon a portfolio approach to
resource allocation. It helps in averting over-investment in any particular type of
business and under-investment in promising businesses from the long-term
perspective. Despite the utility of the BCG matrix, however, it should be used with
care and only as a guideline. It does not provide a concrete measure for making a
finer choice, particularly among the businesses of the same nature.
PLC-based Budgeting
Resource allocation can also be linked to different stages of a Product Life Cycle
(PLC). A product in introductory and growth stages may require more resources
than a product in mature and decline stages.
Zero-based Budgeting (ZBB)
The key differences between ZBB and traditional budgeting is that ZBB requires
managers to justify their budget requests in detail from the scratch, without relying
on the previous budget allocations. Therefore, instead of taking the last year’s
budget as the base for projecting the future allocations, ZBB forces the managers to
review the objectives and operations afresh and
192 -
justify the budget requests. ZBB is, therefore, a type of budget that requires managers to Note
rejustify s
the past objectives, projects and budgets and set priorities for the future. It amounts to
recalculation
of all organisational activities to see which should be eliminated or funded at a reduced
or
increased level.
Capital Budgeting
Capital Budgeting techniques can be used for long-term commitment of resources,

such as capital investments in mergers, acquisitions, joint ventures, and setting up
of new plants etc. Various techniques like payback period, net present value,
internal rate of return, etc. can be used to find which investments would earn
maximum returns.
Operating Budgets
Operating budgets are necessary for more routine resource allocation for
conducting operations. There are two types of systems:
Fixed budgeting system: This system commits resources based on activity
levels. In this type of budgeting, there may be a tendency to retain the
committed resources even if the activity levels are not being achieved, thus
depriving other divisions of the resources, which have a better potential.
Flexible budgeting system: This system provides for transfer of funds from one
unit to another if a fall is expected in actual activity level in a particular unit,
thus ensuring better resource utilization. But this system has the disadvantage
of encouraging non-seriousness about budgetary allocations.
Did u know? What are the different types of routine budgets?
Operating budget specifies materials, labour, overheads and other costs.

Financial budget projects cash receipts and disbursements.
Sales budget specifies sales revenues and selling, distribution and marketing costs.
Expenses budget projects expenses not carried out in other budgets.
10.5.3 Criteria for Resource Allocation Process
In large, diversified companies, the corporate office plays a major role in allocating
resources among various strategies proposed by its operating units or divisions. In many
cases, product groups, business units or functional areas may bid for funds to support
their strategic proposals.
There are three criteria which can be used when allocating resources.
Contribution towards fulfillment of organisational objectives: At the centre

of the organisation, the resource allocation task is to steer resources away
from areas that are poor at delivering the organisation’s objectives and
towards those that are good at delivering the organisation’s objectives.
Support of key strategies: In many cases, the problem with resource allocation
is that the requests for funds usually exceed the funds normally available.
Thus, there needs to be
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193
Notes some further selection mechanism beyond the delivery of the organisation’s
mission and
objectives. This second criterion relates to two aspects of resource analysis:
(a) Support of core competencies: Resources should develop and enhance

core competencies
which, in turn, help achieve competitive advantage.
(b) Enhancement of value chain activities: Resources should assist

particularly those
activities of the value chain which help the organisation to achieve low
cost or
differentiation and thereby enhance and sustain competitive advantage
of the firm.
(c) Risk-acceptance level of the organisation: Clearly, if the risk is higher,

there is a lower
likelihood that the strategy will be successful. Some organisations will be
more
comfortable with accepting higher levels of risk than others. So, the
criterion in this
case needs to be considered in relation to the risk-acceptance level of the
organisation.
!
Caution Sometimes, special circumstances may cause an organisation to amend the
criteria for allocation of resources, Those considerations are:
1. When major strategic changes are unlikely: In this situation,

resources may be allocated on the basis of a formula, e.g. marketing
funds might be allocated as a percentage of sales based on past history
and experience. The major difficulty with such an approach is its
arbitrary nature. It may, however, be a useful shortcut.
2. When major strategic changes are predicted: In this situation,
additional resources may be required to respond to an expected
competitive initiative. In this case, special negotiation with the corporate
office is required for resourcing rather than the adherence to dogmatic
criteria.
3. When resources are shared between divisions: In this situation, the
corporate office may seek to enhance its role beyond that of resource
allocator. It may need to establish the degree of collaboration and, where the
areas disagree, impose a solution.
10.5.4 Factors affecting Resource Allocation
Resource allocation may not necessarily be a purely ‘rational’ decision-making

process. It is also a behavioural and political process involving people who may be
motivated by different objectives. Some of the major factors affecting resource
allocation are discussed below:
Objectives of the organisation: People motivated by different objectives
exercise their influence over the funding of projects. There are two types of
objectives. Official (explicit) objectives and operative (implicit) objectives.
Allocations of resources are more guided by implicit objectives than explicit
objectives. The formal and informal organisations also influence the
perception of which projects should be chosen for funding.
Powerful units: Sometimes, powerful SBU heads secure larger allocation of funds
than their ‘fair share’.
Dominant strategists: The preferences of dominant strategists like the CEO,
Directors, SBU heads, etc. are reflected in the way resources are allocated.
The divisional and departmental heads know that such preferences matter and
try to present their demands in line with them.
Internal politics: Resources are often construed as power, and those units, which
manage to secure substantial resources, are perceived as more powerful than
others. Internal politics within the organisation to secure more and more
resources, affect the process of resource allocation.
194 -
5. External influences: Apart from internal politics, external influences like government Notes
policy, demands of shareholders, financial institutions, community and others, also affect
resource allocation. For example, legal requirements may require additional
finances in labour welfare and social security, pollution control, safety
equipments and energy conservation. The shareholders may expect higher
dividends, and resources have to be directed to them. Financial institutions
may impose restrictions or require companies to invest in technology up-
gradation and R&D. Similarly, the discharge of social responsibilities by the
firm requires allocation of sufficient funds. Thus, external influences affect the
process of resource allocation.
To sum up, we can say that the ‘behavioural’ and ‘political’ considerations are inevitable
in a typical organisation, but one must ensure that they do not dominate the ‘rational’
considerations in allocation of resources. Otherwise, irrational allocation of funds may
jeopardize effective implementation of the strategy and lead to problems in achieving
the desired strategic change.
Task Find out how Microsoft allocates its human and financial resources into
various units.
10.5.5 Difficulties in Resource Allocation
The resource allocation process can sometimes become fairly complex, and may
even create several difficulties to the strategists. Some of the difficulties that can
create problems are:
Scarcity of Resources: Resources are hard to find. Even if finance is available,
the cost of capital could be a constraint. Non-availability of highly skilled
people could be another problem.
Restrictions on Generating Resources: Within organisations, the new units
which have greater potential for growth in the future, may not be able to
generate resources in the short run. Allocation of resources on par with
existing SBUs, divisions and departments through the usual budgeting
process, will put them at a disadvantage.
Bloated Demands: Unit managers may sometimes submit inflated or overstated
demands for funds to guard against any budget-cuts. This subverts the
decision process.
Negative Attitude: Units, which do not get the desired allocations, may develop a
negative attitude towards the corporate managers. They may work at cross
purposes, which may obstruct the implementation of the intended strategy.
Budget Battles: The actual allocation of funds to any unit has a major effect on
the work environment of the unit and the career of the manager concerned. If
a manager loses the ‘budget battle’, his subordinates feel that the manager
has failed them, and may not cooperate with him.
Budgetary Process: The budgetary process itself can lead to problems if it is not
tied to the strategic plans of the firm. If top management fails to communicate
the shifts in the strategic plans and the lower levels are unaware of the shifts,
any intended strategy is unlikely to succeed .
New SBUs: The budgetary process is tied to the way units and divisions are
arranged organisationally. New SBUs can be at a disadvantage if they are
unaware of the intricacies of the budget procedures used in their
organisations.
To avoid the above difficulties, strategists should pay maximum attention to resource
allocation, and ‘prioritize’ budgeting allocations in the initial stages taking overall
objectives into account.
-
195
Notes
Many ‘budget battles’ can be avoided if targets, resource sharing, prioritization, midway
revisions
etc. are decided in an atmosphere of cooperation and participation, especially at
departmental
and divisional levels.
Allocating resources to specific divisions and departments alone does not mean
successful
implementation of the strategy. If major strategic shifts are occurring, the
organisation structure
is likely to change along with the way resources are allocated.
Caselet No Fair!
T
Rashtriyahe regular
Mahila announcements
Kosh in the Budget
for providing micro-credit tofor women
poor include
assetless the strengthening
women, the launchingof
integrated scheme for women's empowerment and the starting of a new scheme for women in
ofthe
difficult circumstances such as the widows of Vrindavan,
an
Kashi and others who are destitute or disadvantaged.

However, the actual announcements in the Budget that impact women are
more than those announced under the specific women's bracket. Some are
positive and some negative. Resources are not fairly allocated for them.
Source: blonnet.com
10.6 Summary
Most strategies need resources to be allocated to them if they are to be

implemented successfully.
A successful strategy formulation does not guarantee successful strategy
implementation. It affects an organisation from top to bottom; it affects all
divisional and functional areas of business.
Implementation of strategy involves a number of interrelated decisions,
choices, and a broad range of activities. It requires an integration of people,
structures, processes etc.
Mc Kinsey’s 7-S model is good at capturing the importance of all these
elements in the implementation of strategy.
A company’s ability to acquire sufficient resources needed to support new
strategic initiatives and steer them to the appropriate organisational units has
a major impact on the strategy implementation process.
10.7 Keywords
Bottom-up Approach: In this approach, resources are distributed through a

process of aggregation from the operating level. The operating levels work out the
requirements of each subunit and the resources are allocated accordingly.
Capital Budgeting: used for long-term commitment of resources, such as capital
investments in mergers, acquisitions, joint ventures etc.
McKinsey 7-S Model: A model of organisational effectiveness that postulates that
there are seven internal factors of an organisation that needs to be aligned and
reinforced in order for it to be successful.
196 -
Operating Budget: Necessary for more routine resource allocation for conducting operations. Notes
Top-down Approach: In this approach, resources are allocated through a process
of segregation down to the operating levels. The Board of Directors, the Managing
Director or members of top management typically decide the requirements of each
subunit and distribute resources accordingly.
Zero Based Budgeting: Budget requests in detail from the scratch, without
relying on the previous budget allocations.
Fill in the blanks:

..............................are the core values of the company that are evidenced in
1. the corporate
culture and the general work ethic.
....................represents the competencies of the employees working for the
2. company.
Resource allocation deals with the ......................and ...................... of financial,
physical and human resources to strategic tasks.
...................... budget specifies materials, labour, overheads and other
4. costs.
...................... and ‘political’ considerations are inevitable in a typical
5. organisation.
The common approach to resource allocation is through ...................... system.
In BCG Matrix, the ...................... represent low growth and low market share.
...................... budgeting system provides for transfer of funds from one unit to
8. another if a
fall is expected in actual activity level in a particular unit.
...................... budgeting techniques can be used for long-term commitment of
9. resources.
The problem with resource allocation is that the requests for funds usually ......................
the funds normally available.
Does a successful strategy formulation guarantee a successful implementation?

Why/ why not?
“Strategic decisions to be communicated and understood throughout the
organisation”. Elucidate.
Why is it said that using a formula approach in resource allocation may be
counterproductive. Discuss with reasons accompanied with examples.
“There has to be a “fit” between the strategy and the organisation.” Substantiate
“Formulation and implementation are inextricably linked”. Discuss
Bring out the differences between formulation and implementation of strategy.
Discuss the relevance of McKinsey’s 7-S model in modern business organisations.
Critically evaluate the McKinsey’s 7-S Model.
“Resource allocation is a powerful tool to communicate the strategies of the
organisation”. Justify
-
197
Suppose you are the head of an organisation that produces chocolate chips
Notes 10. biscuits. You
have a decent amount of money to spend but not as many workers. How will
you allocate
your resources?
Answers: Self Answers
1. Super ordinate goals 2. Skills
3. Procurement, commitment 4. Operating
5. ‘Behavioural’ 6. Budgetary
7. “Dogs” 8. Flexible
9. Capital 10. Exceed
10.10Further Readings
Books Fred R. David, Strategic Management – Concepts and Cases, Pearson

Education Inc., 2005.
Hamel F and Prahalad CK, “Competing for the Future”, Harvard
Business School Press, Boston 1994.
Richard Lynch, Corporate Strategy, Essex, Pearson Education Ltd,
2006.
Online
links www.businessplanning.ws/.../business-plan-strategy-implementation
www.investorwords.com/4218/resource_allocation
www.themanager.org/Knowledgebase/Strategy/Implementation
198 -
Unit 11: Structural
Implementation
Unit 11: Structural Note

s
Implementation
CONTENTS
Objectives
Introduction
Basic Principles of Organisational Structure
Relation between Strategy and Structure
Improving Effectiveness of Traditional Organisational Structures
Types of Organisational Structures
Modular Organisation
Towards Boundaryless Structures
Structures for Strategies
Summary
Keywords
Self Assessment
Review Questions
Further Readings
Objectives

Describe the types of organisational structures
Define organisational design and change
Explain the structures for strategies
Introduction
To implement its strategy successfully a firm must have an appropriate organisational

structure. An organisational structure is a set of formal tasks and reporting relationships
which provide a framework for control and coordination within the organisation. The
visual representation of an organisational structure is called organisational chart. The
purpose of an organisational structure is to coordinate and integrate the efforts of
employees at all levels – corporate, business and functional levels – so that they work
together to achieve the specific set of strategies.
-
199
Strategic
Management
Notes Organisational structure is a tool that managers use to harness resources for getting things
done. It is defined as:
The set of formal tasks assigned to individuals and departments.
Formal reporting relationships, including lines of authority, responsibility, number of
hierarchical levels and span of manager’s control.
The design of systems to ensure effective coordination of employees across
departments.
The set of formal tasks and formal relationships provides a framework for vertical
control of the organisation.
There are two different aspects of the organisational structure:
Superstructure
Infrastructure
Superstructure: This is the highly visible part of the organisational structure. This
depicts how people are grouped into different divisions, departments and
sections and how they are related to each other. The superstructure also
indicates the principal ways in which the organisational operations are
integrated and coordinated. By showing their levels, it indicates which groups
have relatively more strategic importance.
Infrastructure: This is comparatively less visible part of the organisational
structure. It is concerned with issues like delegation of authority,
specialization, communication, information systems and procedures. The
infrastructure enables the organisation to engage in a number of disparate
activities and still keep them coordinated.
The design of organisational structure is a critical task of the top management of an
organisation. It is the skeleton of the whole organisation. It provides relatively more
durable organisational arrangements and relationships.
Thus an organisational structure fulfils two fundamental and opposing
requirements:
Division of labour into various tasks
Coordination of these tasks to accomplish effective control of an organisation.
However, as an organisation grows and becomes more complex, it needs
appropriate changes in its design.
11.1 Basic Principles of Organisational Structure
There are several important principles of organisation, which need to be understood

before building an organisation’s structure. They are:
Hierarchy: Hierarchy defines who reports to whom and the span of control. Span of
control is the number of people reporting to a supervisor. It determines how
closely a supervisor can monitor subordinates. Tall structures have many
levels in the hierarchy and a narrow span. Communication up and down the
hierarchy becomes difficult. Flat structures are horizontally dispersed having
fewer levels in the hierarchy. The trend in recent years has been towards flat
structures allowing for wider spans of control as a way to facilitate better
communication and co-ordination.
Chain of Command: The chain of command is an unbroken line of authority that links
all persons in an organisation and shows who reports to whom. It has two
underlying principles. Unity of command means that each employee is held
accountable to only one supervisor. The scalar principle means a clearly defined
line of authority in the organisation. Authority and responsibility for different tasks
should be distinct. All persons in the
200 -
Unit 11: Structural Implementation
organisation should know to whom they report as well as the successive management Notes
levels all the way to the top.
Specialization: Specialization, sometimes called division of labour, is the degree to
which organisational tasks are subdivided into separate jobs. Work can be
performed more efficiently if employees are allowed to specialize. This is
because an employee in each department performs only the tasks relevant to
his specialized function. Despite the apparent advantages of specialization,
many organisations are moving away from this principle. With too much
specialization, employees are isolated performing only a single, boring job.
Many companies are, therefore, enlarging jobs to provide greater challenges or
assigning tasks to teams so that employees can rotate among several jobs
performed by the team.
Authority, Responsibility and Delegation: Authority is the formal and
legitimate right of a manager to make decisions, issue orders, allocate
resources and command obedience. Responsibility is the duty to perform the
task or activity an employee has been assigned. Accountability means that the
people with authority and responsibility are subject to reporting and justifying
task outcomes to those above them in the chain of command.
Notes Delegation is the process managers use to transfer authority and

responsibility to positions below them in the hierarchy. The principle is that there
must be parity between authority and responsibility. It means managers can be
made accountable for results only when they are delegated with sufficient
authority commensurate with the responsibility.
Most organisations today encourage managers to delegate authority to the
lowest possible level to provide maximum flexibility to meet customer needs
and adapt to the environment. Managers are encouraged to delegate
authority, although they often find it difficult.
Centralization and Decentralization: Centralization and decentralization refer to
the level at which decisions are made. Centralization means that decision-
making is done at the top levels of the organisation. Decentralization means
that decision making is pushed down to the lower levels in the organisation.
Centralization helps in better coordination, but too much centralization results
in slow response and demotivates people at lower levels. Decentralization
relieves the burden on top managers, makes greater use of worker’s skills,
ensures decision making by well-informed people and permits rapid response
to external changes. But it does not mean that every organisation should
decentralize. Managers should diagnose the organisational situation and
select the decision-making level.
Formalization: Formalization is the extent to which written documentation is used
to direct and control employees. Written documentation includes rules,
regulations, policies, procedures, job descriptions etc. They are inexpensive
ways to coordinate activities. These documents complement the
organisational structure by providing descriptions of tasks, responsibilities and
authority. The use of rules and regulations is a part of bureaucratic model of
organisation.
!
Caution Although written documentation is intended to be rational and helpful to
the organisation, it often creates “red tape” that causes more problems than it
solves.
Narrowly defined job descriptions, for example, tend to limit the creativity,
flexibility and rapid responses needed in today’s knowledge-based
organisations. Many organisations today are reducing formalization and
bureaucracy.
-
201
Departmentalization: Another fundamental characteristic of organisational

Notes 7. structure is
departmentalization, which means grouping positions into departments and
departments
into the total organisation.
Did u know? What is organisational design?

The process of designing an organisation’s structure to match with its situation
is called organisational design. The best design for an organisation is
determined by many aspects of its situation, viz. the size, technology,
environment and strategy. Managers make choices about how to use the chain
of command to group people together to perform their work. The functional,
divisional and matrix structures are traditional approaches that rely on the
chain of command to define departmental groupings and reporting
relationships along the hierarchy. Newer approaches such as teams, networks
and virtual organisations have emerged to meet changing organisational
needs in an increasingly global, knowledge-based business environment.
Caselet Reinventing Organisation Design
O rganisation design
company. is not must
Companies a mere exercise
break in changing
away from the dogmastructures and and
of structure processes
process,inbut
focus more on values. Structures are meant only to serve a chosen purpose.
a
What is important is that people are enabled to achieve that chosen purpose.
The prime objective of organisation design is to create a business entity
around a strong foundation of shared values and goals. The basic criterion is
that purpose and values must be reflected in all the activities of the
organisation.
The concept of organisation design is simple in theory but highly complex in
practice because of two reasons. First, the sheer number and variety of
elements that make up an organisation and their inter-relationships are
immense. Managing this complexity is a logistical nightmare beyond the wit of
majority of managers.
Second, the central factor in any organisation is people; and people defy logic
and common sense. Everyone is an individual and expects to be recognised
and treated as such. No two persons are similar. Everyone brings to work
his/her own attitudes, aspirations, and problems.
Superimposing these two factors – the unpredictable and irrational nature of
people, and the complexity associated with the number of elements in an
organisation – this overlay presents a phenomenal challenge. As the needs of the
individual take on greater importance in the knowledge economy, the difficulty is
compounded requiring an altogether different dimension of organisation design.
Recognising that organisation design is a process, and not an outcome is
important. It is a journey, and not a destination.
Source: thehindubusinessline.com
11.2 Relation between Strategy and Structure
Strategic management posits that the strategy and the organisation structure of the firm
must match. In a classic study of large U.S. corporations such as DuPont, General Motors,
Sears, and Standard Oil, Alfred Chandler concluded that structure follows strategy. This
means that changes
202 -
in corporate strategy lead to changes in organisational structure. He also concluded that Notes
organisations follow a pattern of development from one kind of structural arrangement to
another as they expand. According to Chandler, these structural changes occur because the old
structure was not suitable. Chandler therefore proposed the following as the sequence of what
occurs:
1. New strategy is created
2. New administrative problems emerge
3. Economic performance declines
4. New appropriate structure is invented
5. Profit returns to its previous level
Chandler found that in their early years, corporations such as DuPont and General
Motors had a centralized functional structure, which was suitable for a limited
range of products. As they added new product lines and created their own
distribution networks, the old structure became too complex. Therefore, they
shifted to a decentralized structure with several autonomous divisions.
11.3 Improving Effectiveness of Traditional Organisational Structures
In the changed times and situations, traditional organisational structure is

crumbling under the weight of ever-increasing regulations that drive greater
accountability and transparency. Smart companies are on the forefront of building
new and improved structures that support and enhance this new compliance
environment, and best practices are emerging.
The best structure for an organisation is determined by many aspects of its
situation – the technology, size, environment and strategy. Frequently, structures
evolve as the organisation moves from one stage of growth to the next. The
external and internal environments affect structural design in different ways.
Example: 1. An organisation which faces a stable environment may use

functional structure.
A volatile environment demands a rapid-response capability,
flexibility and quick decision-making. Such demands can be
better met by the creation of a divisional or a matrix type of
structure.
According to Mintzberg, there are four main characteristics of the environment that
influence structure.
Table 11.1: Environmental Types and their Impact on Organisational Structure
Consequences for
Type of Range Organizational
Environment Structure
Rate of change Static Dynamic As rate of change increases, the
organization needs to be kept more
flexible
Degree of Simple Complex Greater complexity needs more
complexity formal co-ordination
As markets become more
Market complexity Involved in single market diversified,
divisionalisation becomes
involved in diversified advisable
markets
Greater hostility probably needs
Competitive Passive Hostile the
situation protection of greater centralisation
-
203
Notes Rate of Change
When the organisation operates in a more dynamic environment, it needs to be

able to respond quickly to the rapid changes that occur. In static environments,
change is slow and predictable and does not require great sensitivity on the part of
the organisation. In dynamic environments, the organisation structure and its
people need to be flexible, well co-ordinated and able to respond quickly to outside
influences. The dynamic environment implies a more flexible, organic structure.
Degree of Complexity
Some environments can be easily monitored from a few key data movements.
Others are highly complex, with many influences that interact in complex ways.
One method of simplifying the complexity is to decentralize decisions in that
particular area. The complex environment will usually benefit from a decentralized
structure.
Market Complexity
Some organisations sell a single product or variations on one product. Others sell
ranges of products that are essentially diverse. As markets become more diverse,
there is usually a need to divisionalise the organisation as long as synergy or
economies of scale are unaffected.
Competitive Situations
With friendly rivals, there is no great need to seek the protection of the centre. In
deeply hostile environments, however, extra resources and even legal protection
may be needed; these are usually more readily provided by central headquarters.
As markets become more hostile, the organisation usually needs to be more
centralized.
The effectiveness of traditional organisational structures can be improved by regular
revision and development of the skill sets held by the employees. If change is not
handled correctly, it can be more devastating than ever before. The management
has to identify those employees that are high performers and have the potential to
reflect, discover, assess, and act. The management has to instill the new focus of
connecting the heads, hearts, and hands of people in the organisation. On big
problem may be the problem of strategy implementation. The management as well
as the team heads must learn how to motivate others and build an efficient team.
Structural changes are essential to better position the organisation as compared
with its competitors, focus on client needs and move forward in development and
sustainability programmes. Sometimes reorganisation maybe required to provide a
framework for longer-term commitment to organisational objectives and vision.
The management should encourage the entire organisation in general and sub units
in particular to put work teams in place to ensure that each sector integrates staff
and services into a cohesive, focused business unit. Consultation and participation
should be made part and parcel for the programme for the successful development
and implementation of organisational goals and objectives.
Each work team should be asked to develop an effective process for discussion of
major challenges and opportunities facing the organisation, if possible, over the
next decade. Updated strategic plans should be then developed. These plans should
form the framework for focusing organisational resources on the most strategic
areas by using a staged approach. Updated plans
204 -
should then be implemented by work teams at all levels of management. Work-team objectives
Notes must include:
Involving all levels of staff in consultation
Designing and implementing a process to develop-goals and objectives for the
organisation and unit; a strategic process for the next five to ten years
Defining and clarifying organisational structures and identifying functions,
customers, and service delivery models
Identifying changes and staged approaches needed to move from the current
situation to what will be required over the next three to five years
Identifying and recommending priorities for policy and programme development
Incorporating goals for expenditure reduction, service quality improvement,
workforce management, accountability, technology, and business process
improvement.
11.4 Types of Organisational Structures
There are seven basic types of organisational structures:

Simple structure
Functional structure
Divisional structure
SBU structure
Matrix structure
Network structure
Virtual structure
Let us understand each of them briefly.
Simple Structure: In this structure, the owner-manager controls all activities and
makes all the decisions. This structure may be appropriate for small and
young organisations. Coordination of tasks is done through direct supervision.
There is little specialization of tasks, few rules and regulations and
communication is informal.
Figure 11.1: Simple Structure
Owner-Manager
Employees
Example: Small businesses like mom and pop stores, small restaurants
etc have a simple organisation structure.
Functional Structure: Functional structures are grouped based on major functions
performed. Each function is led by a functional specialist. Functional structures
are formed in organisations in which there is a single or closely related
products or services.
-
205
Notes Figure 11.2: Functional Structure
CEO
Manufacturing Marketing Finance Human Resources R&D
Example: Small business with one product line could start making the
components it requires for production of its products instead of procuring it
from an external organization. It is not only beneficial for organization but also
for employees' faiths.
Divisional Structure: Divisional structures are used by diversified organisations.

In a divisional structure, divisions are created as self-contained units with
separate functional departments for each division. A division may be
organised around geographic area, products, customers etc. The head office
determines corporate strategy, allocates resources among divisions and
appoints and rewards the heads of these divisions. Each division is responsible
for product, market and financial objectives for the division as well as their
division’s contribution to overall corporate performance.
Figure 11.3: Divisional Structure
CEO
Division 1 Division 2 Division 3
Same as Same as
Manufacturing Marketing Finance HR
Division 1 Division 1
Example: Divisions can be categorized from different points of view. One

might make distinctions on a geographical basis (a US division and an EU
division, for example) or on product/service basis (different products for
different customers: households or companies). In another example, an
automobile company with a divisional structure might have one division for
SUVs, another division for subcompact cars, and another division for sedans.
Matrix Structure: The matrix structure is, in effect, a combination of functional
and divisional structures. In this structure, there are functional managers and
product or project managers. Employees report to one functional manager and
to one or more project managers. For example, a product group wants to
develop a new product. For this project it obtains personnel from functional
departments like Finance, Production, Marketing, HR, Engineering etc. These
personnel work under the product manager for the duration of the project.
Thus, they are responsible for two managers – the product manager and the
manager of their functional area.
206 -
Notes
Figure 11.4: Matrix Structure
Matrix Structure
Top Management
Manufacturing Sales Finance Personnel
Manager Manufacturing Sales Finance Personnel

Project A Unit Unit Unit Unit

Project B Unit Unit Unit Unit

Project C Unit Unit Unit Unit

Project D Unit Unit Unit Unit
While functional heads have vertical control over the functional managers, the
product or project heads have horizontal control over them. Thus, matrix
structure provides a dual reporting. The dual lines of authority makes the
matrix structure unique. The matrix structure has been used successfully by
companies such as IBM, Unilever, Ford Motor Company etc.
Example: Starbucks is one of the numerous large organizations that

successfully developed the matrix structure supporting their focused strategy.
Its design combines functional and product based divisions, with employees
reporting to two heads. Creating a team spirit, the company empowers
employees to make their own decisions and train them to develop both hard
and soft skills. That makes Starbucks one of the best at customer service.
Network Structure: A network organisation outsources or subcontracts many of its
major functions to separate companies and coordinates their activities from a
small headquarters. Rather than being housed under one roof, activities like
design, manufacturing, marketing, distribution etc. are outsourced to separate
organisations that are connected electronically
to the central office.
Figure 11.5: Network Structure
Accounts
Receivable
Company
(USA)
Design Distribution
Company Company
(Canada) (Europe)
Company
Core (hub)
Transportation Manufacturing
Company Company
(Korea) (Asia)
-
207
Notes
Example: Athletic shoe companies like Nike and Reebok have
outsourced manufacturing of their shoes to countries such as China and
Indonesia, where labour costs are low. What Nike or Reebok does is the design
and marketing of shoes. Networked computer systems and the Internet enable
the organisation to exchange data and information. The organisation may be
viewed as a hub surrounded by a network of outside specialists.
As may be seen from the above, the core organisation is only a shell with a
small headquarters acting as a broker connected to supplier, design,
manufacturing etc. organisations.
Example: Hennes and Mauritz( H&M), a famous Swedish retail clothing

company, is outsourcing its clothing to a network of 700 suppliers, more than
two-thirds of which are based in low-cost Asian countries. Not owning any
factories, H&M can be more flexible than many other retailers in lowering its
costs, which aligns with its low-cost strategy. The potential management
opportunities offered by recent advances in complex networks theory have
been demonstrated including applications to product design and development,
and innovation problem in markets and industries.
Virtual Organisation: This is an extension of the network structure. In this
approach, independent organisations form temporary alliances to exploit
specific opportunities, then disband when their objectives are met. The term
virtual means “being in effect but not actually so”. The virtual organisations
consist of a network of independent companies – suppliers, customers or even
competitors – linked together to share skills, costs, markets and rewards. The
members of a virtual organisation pool and share the knowledge and expertise
of each other.
Creating Agile Virtual Organisation: New ways to manage change and to
compete in a rapidly changing business world are emerging under the concept
of the agile enterprise. Agile organisations can be almost any size or type, but
what distinguishes them from their lumbering traditional business
counterparts is the ability to read and to react quickly. They can also be
virtual, meaning they can reconfigure themselves quickly and temporarily in
response to a challenge, which gives them agility, but then dissolve or
transmute themselves into something else.
Virtual organisations have been existing throughout history, from the whaling
companies of the 19th century through the film studios of the 20th. The virtual
organisations have few full-time employees or usually temporarily hire outside
specialists to complete a specific project, such as a new software application.
These people do not become a part of the organisation, but join together as a
separate entity for a specific purpose. Sometimes companies use a virtual
approach to harness the talents and energies of the best people for a
particular job, rather than trying to develop those capabilities in-house.
Now that serious management tools are beginning to appear, the agile virtual
enterprise is no longer just a theoretical possibility. When an organisation uses
a virtual approach, the virtual group typically has full authority to make
decisions and take actions within certain predetermined boundaries and goals.
Most virtual organisations use electronic media for sharing of information and
data. Some organisations have redesigned offices to provide temporary space
for virtual workers to meet or work on-site.
208 -
Advantages and Disadvantages: Notes
Advantages
It can draw on expertise worldwide.
It is highly flexible and responsive.
It reduces overhead costs.
Disadvantages
Lack of control because the boundaries of a virtual organisation are weak and
ambiguous.
Virtual teams place new demands on managers, who have to work with new
people, new ideas and new problems.
Virtual organisation poses communication difficulties, and managers may lose
motivation.
Example: Computer organizations that have successfully implemented

forms of this new structure include Apple Computer and Sun Microsystems.
When Apple Computer linked its easy-to-use software with Sony's
manufacturing skills in miniaturization, Apple was able to get its product to
market quickly and gain a market share in the notebook segment of the PC
industry.
Sun Microsystems has been considered another highly decentralized
organization comprised of independently operating companies. Sun
positions information systems as a top priority, trying to achieve faster and
better communication. With numerous "SunTeams," members operate
across time, space, and organizations to address critical business issues.
Sun managers identify key customer issues and then form teams with the
critical skills and knowledge needed to address the issue. This team might
include sales people, marketing personnel, finance, and operations from
various places around the globe; customers and suppliers may become
episodic members as necessary. Weekly meetings may take place via
conference calls. Critical to the team's success is the selection of talent
from the organization, defining a clear purpose for the team's efforts, and
establishing communication links among the team members.
Sun has been working on further development of technologies such as EDI (Electronic
Data Interchange) and RFID (Radio Frequency Identification technology). Both EDI and
RFID will impact information exchange globally and across numerous industries.
Source: Wikipedia and www.referenceforbusiness.com)
Task Can you name two virtual organisations? Why and how were they formed?
11.5 Modular Organisation
The organisational capabilities to interact with others have been greatly improved as a
result of modern information and communications technologies: Nowadays a company
can maintain more relationships with more companies at much lower costs than before.
The increased business networks require modularization of the products, the processes
and the firm in order to be effective. Modular products tend to favor a modular
organisation form, as the various units
-
209
involved in the design process of products with interchangeable components are

Notes loosely coupled,
operate autonomously, and can be easily reconfigured.
The concept of modularity can be applied not only to complex product system
design, but also
to business system interpretation and design. A modular organisation is one in
which different
functional components are separated from one another, a technique adopted from
software
engineering.
A modular organisation is in contrast to a composite organisation in which there is no
separation
between functions. Modular organisation is also distinct from hierarchical
organisation. Modular
organisation is chiefly concerned with the horizontal design of a system.
Modularity allows components to be produced separately and used interchangeably
in different
configurations without compromising system integrity. In modular organisations,
coordination
tasks are delegated to individual modules (functions, teams, etc.) and coherence is
achieved
easily through fully specified interfaces. In addition to the reduction of managerial
complexity,
this structural, hierarchical function-based decomposition results in the localization of
the impacts
of environmental disturbances within specific modules, increasing the immunity and
adaptability of the overall organisation in a turbulent environment.
11.6 Towards Boundaryless
Structures
Traditional companies with boundaries, rules, and extensive plans are at a supreme
disadvantage
in today' globalized world, where technology changes daily and the value chain
commands
changes of its own. In a traditional company where people are categorized into
neatly defined
positions with their job descriptions filed in triplicate in the Human Resources
department, the
way a company plans its business can cause it to sink despite planning because the
boundaries
can mean lost opportunities, being overtaken by the competition, loss of revenues,
or watching
its niche slip away because of a new technology, an alteration in the global
marketplace, or
simply a failure to market its product effectively. When changes occur, they happen
too quickly
for its organisational processes to meet them; as a result, opportunities are quickly
lost, problem
situations take over rapidly, and before the company can respond appropriately, it
has lost
customers, opportunities, and market share. Although that company likely has more
than enough
talent within its walls to offset all of those disasters, the talent is never put to use,
because
employees are constrained to operate within the confines of their job descriptions,
where only
the prescribed talents can be put to good use.
The answer to this dilemma lies in boundaryless organisations. A boundaryless
organisation is
a contemporary approach to organisational design. It is an organisation that is not
defined by,
or limited to, the horizontal, vertical, or external boundaries imposed by a
predefined structure.
This term was coined by former GE chairman Jack Welch because he wanted to
eliminate
vertical and horizontal boundaries within GE and break down external barriers
between the
company and its customers and suppliers.
A big question is if all companies become boundaryless? Yes, but not all companies
can do it
today, because an organisation has to be completely compatible with such a radical
methodology.
Upper level management has to embrace it wholeheartedly, knowing that their
status will
essentially vanish in the new organisation, and employees have to be retrained to
understand
how to operate under the new paradigm. Companies should already be in the
process of getting
to that point, however, and those that do it first will have the greatest advantage.
210 -
Notes
11.7 Structures for Strategies
To understand the logic behind this approach to the development of organisational
structures, it is helpful to look at the historical background. As already mentioned,
prior to the early 1960s, the US strategist Alfred Chandler studied how some
leading US corporations had developed their strategies in the first half of the
twentieth century. He then drew some major conclusions from this empirical
evidence, the foremost one being that the organisation first needed to develop its
strategy and, after this, to devise the organisation structure that delivered that
strategy. Chandler drew a clear distinction between devising a strategy and
implementing it. He defined strategy as:
“The determination of the basic long-term goals and objective of an enterprise, and the
adoption of courses of action and the allocation of resources necessary for carrying out
these goals”.
The task of developing the strategy took place at the corporate and business levels
of the organisation. The job of implementing it then fell to the various functional
areas. Chandler’s research suggested that, once a strategy had been developed, it
was necessary to consider the structure needed to carry it out. A new strategy
might require extra resources, or new personnel or equipment which would alter the
work of the enterprise.
Changes in Business Environment and Social Values

Table 11.2
Early twentieth century Early twenty- first century

Uneducated workers, typically just
moved Better educated, computer- literate,
from agricultural work into the cities skilled
Complex, computer-driven, large-
Knowledge of simple engineering and scale
technology Multifaceted and complex nature of
The new science of management management now partially
recognized understood
simple cause-and-effect relationship Mix of some mature, cyclical markets
Growing, newly industrializing markets and some high-growth, new-
and suppliers technology markets and suppliers
Sharp distinctions between Greater overlap between
management management
and workers and workers in some industrialized
countries
To understand why it is no longer appropriate to develop an organisation structure

after deciding a strategy, the earlier theory needs to be placed in its historic
strategic context. Since Chandler’s research in the early twentieth century, the
environment has changed substantially. The workplace itself, the relationship
between workers and managers, and the skills of employees have all altered
substantially. Old organisational structures embedded in past understandings may
therefore be suspect. Table 11.2 summarizes how the environment has changed
from the early twentieth century to early twenty-first century.
Strategy and Structure are Interlinked
According to modern strategists, strategy and structure are interlinked. It may not
be optimal for an organisation to develop its structure after it has developed its
strategy. The relationship is more complex in two respects:
Strategy and the structure associated with it may need to develop at the same time in
an experimental way : As the strategy develops, so does the structure. The
organisation learns to adapt to its changing environment and to its changing
resources, especially if such change is radical.
2. If the strategy process is emergent, then learning and experimentation involved
may need a more open and less formal organisation structure.
211
Notes Managing the Complexity of Strategic Change
Quinn suggests that strategic change may need to proceed incrementally, i.e. in
small stages. He called the process “logical incrementalism”. The clear implication
is that it may not be possible to define the final organisation structure, which may
also need to evolve as the strategy moves forward incrementally. He recognizes the
importance of informal organisation structures in achieving agreement to strategy
shifts. If the argument is correct, it will be evident that any idea of a single, final
organisation structure – after deciding on a defined strategy – is dubious.
Criticism of the Strategy – First, Structure- Afterwards Process
Structures may be too rigid, hierarchical and bureaucratic to cope with the newer
social values and rapidly changing environment.
The type of structure is just as important as the business area in developing the
organisation’s strategy. It is the structure that will restrict, guide and form the
strategy.
Value chain configurations that favour cost cutting or, alternatively, new market
opportunities may also alter the organisation required.
The complexity of strategic change needs to be managed, implying that more
complex organisational considerations will be involved. Simple configurations
such as a move from a functional to a divisional structure are only a starting
point in the process.
The role of top and middle management in the formulation of strategy may also
need to be reassessed: Chandler’s view that strategy is decided by the top
leadership alone has been challenged. Particularly for new, innovative
strategies, middle management and the organisation’s culture and structure
may be important. The work of the leader in empowering middle management
may require a new approach – the organic style of leadership.
The Concept of ‘Strategic Fit’
Although it may not be possible to define which comes first, there is a need to
ensure that strategy and structure are consistent with each other. For example,
Pepsi Co reorganised its North American business to ensure that its strengths in the
growing non-carbonated drinks market could be exploited across its full range of
drinks. For an organisation to be economically effective, there needs to be a
matching process between the organisation’s strategy and its structure. This is the
concept of strategic fit.
In essence, organisations need to adopt an internally consistent set of practices in
order to undertake the proposed strategy effectively. It should be said that such
practices will involve more than the organisation’s structure. They will also cover
such areas as reward systems, information systems and processes, culture,
leadership styles, etc.
There is strong empirical evidence, both from Chandler and Senge, that there does
need to be a degree of strategic fit between the strategy and the organisation
structure.
Although the environment is changing all the time, organisations may only change
slowly and not keep pace with external change, which can often be much faster –
for example, the introduction of digital technology. It follows that it is unlikely that
there will be a perfect fit between the organisation’s strategy and its structure.
There is some evidence that a minimal degree of fit is needed for an organisation to
survive. It has also been suggested that, if the fit is ensured early during the
strategic development process, then higher economic performance may result.
However, as the environment changes, the strategic fit will also need to change.
212 -
Unit 11: Structural
Implementation
Notes
Case Study Boundarylessness: The

Welch Way
G lobalization has certainly

advances. changed the
HR organizations thatway that HRglobalization
embrace does business, enabled by are
opportunities
ways to deliver their strategic value in that new environment. So,
technology
finding
human capital plans can be presented that take advantage of a global
workforce, talent can be identified and aligned with customers, no matter
where they may be. Technology offers the capability to maintain contact and
information flow to employees--through web sites, e-mails, webinar, video
conference and virtual sites such as Second Life.
'Boundarylessness' was developed at General Electric in the late 1980s and
early 1990s, and it is one of the cultural elements General Electric credits for
its phenomenal success over the last fifteen years. Proponents of
boundarylessness believe traditional boundaries between layers of
management (vertical boundaries) and divisions between functional areas
(horizontal boundaries) have stifled the flow of information and ideas among
employees. A boundaryless culture seeks to overcome the limitations imposed
by these and other internal corporate divisions.
Jack Welch certainly propelled it into the world's corporate consciousness with
his Work-Out program at General Electric in the early 1990s. In 1992, he
described boundarylessness this way: GE's diversity creates a huge laboratory
of innovation and ideas that reside in each of the businesses, and mining them
is both our challenge and an awesome opportunity. Boundaryless behavior is
what integrates us and turns this opportunity into reality, creating the real
value of a multi-business company -- the big competitive advantage we call
Integrated Diversity.
"Boundaryless behavior has become the 'right' behavior at GE, and aligned
with this behavior is a rewards system that recognizes the adapter or
implementer of an idea as much as its originator. Creating this open, sharing
climate magnifies the enormous and unique advantage of a multibusiness GE,
as our wide diversity of service and industrial businesses exchange an endless
stream of new ideas and best practices"-- This quote ignited my interest in the
link between organizational evolution and boundarylessness. Because of its
unique position as a "multibusiness" company, General Electric recognized the
importance of idea adaptation, or in organizational evolution terms,
recombination. By creating an atmosphere where adapting and implementing
a good idea from another area of GE or from outside is valued as much as or
more than generating the good idea, Jack Welch focused his company on
getting the maximum benefit from its diverse and powerful intellectual capital.
"Town meetings," developed at GE as it embraced boundarylessness, are an
important tool in creating boundaryless organizations. In a town meeting,
employees with a common goal or purpose (serving the same customer, working
on the same product or process, etc.) but from different areas and different levels
of management come together to discuss new ideas. In the organizational
evolution reading of boundarylessness, town meetings are recombination
workshops. Groups work for a few days before town meetings to generate and
refine new ideas, and the ideas are presented, discussed, and either killed or
implemented at the meetings. The town meeting format provides "safe ways" for
anyone's ideas to be challenged by anyone else, without regard to position or
authority. Town meetings have two purposes. First, of course, is to generate and
implement change ideas. Second however, is to educate people on their "real
degrees of freedom," to let employees
Contd...
213
Notes know what decisions they can make on their own and to encourage them to do
so. This
creates an atmosphere where change, i.e. recombination, is not only encouraged
at town
meetings, it is encouraged throughout the organization whenever and wherever
it is
necessary.
The benefits of globalization are so well known that most businesses would take
full
advantage of them immediately, if only it were easier to do. Making globalization
work
demands new types of expertise that traditional organizations often lack. While
technology
has eliminated a number of barriers to globalization (most notably those
involving time
and space), many significant barriers still remain, particularly those involving
people and
the organizations we build around them. The enormous cultural diversity in
today's
global economy makes evaluating, assessing, recruiting and managing talent a
challenge
- perhaps the challenge - for transnational companies. There are several key
steps
companies and their talent leaders can take to meet that challenge and build a
global
workforce that delivers high performance with high integrity.
Question
Is it possible for all the organisations to follow the GE method?
Source: www.milagrow.in
11.8 Summary
Organisations are structured in a variety of ways, dependant on their

objectives and culture.
The structure of an organisation will determine the manner in which it
operates and it's performance.
Structure allows the responsibilities for different functions and processes to be
clearly allocated to different departments and employees.
The wrong organisation structure will hinder the success of the business.
Organisational structures should aim to maximize the efficiency and success
An effective organisational structure will facilitate working relationships
between various sections of the organisation.
It will retain order and command whilst promoting flexibility and creativity.
Internal factors such as size, product and skills of the workforce influence the
organisational structure.
As a business expands the chain of command will lengthen and the spans of
control will widen.
The higher the level of skill each employee has the more the business will
make use of the matrix structure to maximize these skills across the
organisation.
11.9 Keywords
Agile Organisation: A firm that identifies a set of business capabilities central to
high profitability operations and then build a virtual organisation around those
capabilities.
Chain of Command: an unbroken line of authority that links all persons in an
organisation and shows who reports to whom
214 -
Formalization: extent to which written documentation is used to direct and control employees Notes
Hierarchy: defines who reports to whom and the span of control

Infrastructure: concerned with issues like delegation of authority, specialization, communication,
information systems and procedures
Modular Organisation: An organisation in which different functional components are separated
from one another.
Outsourcing: subcontracting a service with another company or person to do a particular function.
Span of Control: The number of employees that each manager/supervisor is responsible for.
Superstructure: depicts how people are grouped into different divisions, departments and sections
and how they are related to each other
Virtual Organisations: consist of a network of independent companies - suppliers, customers or
even competitors linked together to share skills, costs, markets and rewards
11.10Self Assessment
Fill in the blanks:

The ................ indicates the principal ways in which the organisational
1. ..... operations are
integrated and coordinated.
The ................ enables the organisation to engage in a number of disparate
2. ..... activities.
..................... means that each employee is held accountable to only one
3. supervisor.
..................... means that decision-making is done at the top levels of the
4. organisation.
The ................ principle means a clearly defined line of authority in the
5. ..... organisation.
..................... is the process managers use to transfer authority and responsibility
6. to positions
below them in the hierarchy.
The process of designing an organisation's structure to match with its situation is called
.....................
Divisional structures are used
8. by ..................... organisations.
The ................ structure is, in effect, a combination of functional and divisional
9. ..... structures.
A .................. organisation outsources or subcontracts many of its major
10. ... functions to
separate companies.
The complex environment will usually benefit
11. from a ..................... structure.
As markets become more hostile, the organisation usually needs to
12. be .....................
centralized.
A .................. organisation is an organisation that is not defined by, or limited
13. ... to, the
horizontal, vertical, or external boundaries imposed by a predefined structure.
The biggest advantage of an agile virtual organisation is it can draw
14. on .....................
worldwide.
A modular organisation is in contrast to
15. a ..................... organisation.
-
215
Notes
In your opinion, what fundamental requirements does an organisational structure

fulfill?
Do you agree with the statement that work can be performed more efficiently if
employees are allowed to specialize? Why/why not?
What do you see as the reason behind the recent trend of most organisations
encouraging managers to delegate authority to the lowest possible level?
In your opinion, which aspects of an organisation determine the best design for it?
Compare and contrast the functional and divisional structures?
Give example of an organisation that has successfully employed the matrix
structure. Analyse its success mantra.
Prove that network structure can weaken the employee loyalty.
Illustrate the advantages due to which some organisations sell a single product or
variations on one product.
"Being boundary-less can be the disadvantages for an organisation". Explain
Suggest any three advantages of modular organisations.
infrastructur
1. superstructure 2. e
Centralizatio
3. Unity of command 4. n
5. scalar 6. Delegation
7. organisational design 8. diversified
9. matrix 10. network
11. decentralized 12. more
13. boundaryless 14. expertise

composite
Burt R.S., Structural Holes: The Social Structure of Competition,

Books Harvard University
Press: Cambridge,
Garud R., Kumaraswamy A., Technological and Organisational Designs
for
Realizing Economies of Substitution, Strategic Management, Journal.
Online links www.indiastudychannel.com/.../70029-Types-organisational-structure

www.marcbowles.com/courses/adv.../amc3_ch6two1
www.mang.canterbury.ac.nz/courseinfo/.../MGMT206SUppt
216 -
Unit 12: Behavioural
Implementation
Unit 12: Behavioural Note

s
Implementation
CONTENTS
Objectives
Introduction
Stakeholders and Strategy
Strategic Leadership
23 Role of a Strategic Leadership
24 Leadership Approaches
Corporate Culture and Strategic Management
23 Influence of Culture on Behaviour
24 Creating Strategy Supportive Culture
Personal Values and Ethics
23 Importance of Ethics
24 Approaches to Ethics
25 Building an Ethical Organisation
Social Responsibility and Strategic Management
23 Responsibilities of Business
24 Need for CSR: The Strategy
Summary
Keywords
Self Assessment
Review Questions
Further Readings
Objectives

Explain the concept of stakeholder management
Describe the concept of strategic leadership
Discuss the corporate culture and strategic management
Identify the role of personal values and ethics
Realise the concept between social responsibility and strategic
management
-
217
Notes
Introduction
Successful strategy formulation does not at all guarantee successful strategy

implementation. It is always more difficult to actually carry out something than to
say you are going to do it. Strategy implementation requires support, discipline,
motivation and hard work from all managers and employees. Managers should pay
careful attention to a number of key issues while executing the strategies. Chief
among them are how the organisation should be structured to put its strategy into
effect and how such variables as leadership, power and organisational culture
should be managed to enable employees to work together while implementing the
firm’s strategic plans. Organisations in stable, predictable environments often
become relatively tall, with many hierarchical levels and narrow spans of control.
On the other hand, companies in dynamic, rapidly changing environments usually
adopt flat structures with few hierarchical levels and wide spans of control.
12.1 Stakeholders and Strategy
A firm’s stakeholders are the individuals, groups, or other organisations that are
affected by and also affect the firm’s decisions and actions. Depending on the
specific firm, stakeholders may include government, employees, shareholders,
suppliers, distributors, the media and even the community in which the firm is
located among many others.
When it comes to corporate mission values stakeholders will maximise the value for
all stakeholders, as opposed to shareholders who only maximise the value for
themselves.
Stakeholders also play a role in the decision making process in a business. Although
since employees and customers are included in being stakeholders they too
are considered when it comes to decision making.
When it comes to accountability it does not just come down to being accountable to
themselves. Accountability lies with the customer, suppliers, government,
community and employee stakeholders.
Stakeholder Management
An organisation needs to have an effective stakeholder management system in place,

which provides a great support in achieving its strategic objectives. It interprets and
influences both the external and internal environments and creates positive relationships
with stakeholders through the appropriate management of their expectations and
agreed objectives. Stakeholder Management is a process and control that must be
planned and guided by underlying principles.
Stakeholder Management, within business or projects, prepares a strategy that
utilises information or intelligence collected during the following common processes:
Stakeholder Identification: identify the parties, either internal or external to
organisation, that are affected by the business. For this purpose, a
stakeholder map can be used.
Stakeholder Analysis: identify and acknowledge stakeholder’s needs, concerns,
wants, authority, common relationships, interfaces, and put this information in
line within the Stakeholder Matrix.
Stakeholder Matrix: position the stakeholders on a matrix based on their level of
influence, impact or enhancement they may provide to the business or its
projects.
Stakeholder engagement: engaging stakeholders does not seek to develop the
project/ business requirements, solution or problem creation, or establishing
roles and responsibilities. The process focuses on knowing and understanding
each other, at the
218 -
Unit 12: Behavioural Implementation
Executive level. It gives an opportunity to discuss and agree expectations of communication Notes
and, primarily, agree a set of Values and Principles that all stakeholders will abide by.
Communicating Information: expectations are established and agreed for the
manner in which communications are managed between stakeholders - who
receives communications, when, how and to what level of detail. Protocols
may be established including security and confidentiality classifications.
Notes An organisation can follow these basic tips to manage their stakeholders effectively:
The organisation must prioritise business and stakeholders’ needs. In order to

feel like the organisation is still yours without offending or losing big
stakeholders that contribute money to keep your company in business,
the organisation needs to think strategically and balance out business
needs and stakeholders’ needs. This means that they have to capture
business processes and link them to projects software and capabilities.
They will also need to modify their prioritisation as their understanding of
the application and stakeholder needs change. They also need to take
into consideration the customer needs as well by involving them in the
project.
The organisation should develop the growth activities around stakeholder
needs. By leveraging certain developments or user center designs, an
organisation can accept the fact that stakeholder needs will change over
time. As you business changes so will the needs of the stakeholders and
they will need to also meet their changing needs.
The organisation should understand the available assets. By understanding
what assets are available to the business, they can also balance asset
reuse with stakeholders needs. Some examples of business assets would
be legacy applications, reusable components, etc.
12.2 Strategic Leadership
Leadership is the art and process of influencing people so that they will strive willingly
and enthusiastically towards achievement of the organisation’s purpose. Specific styles
of leadership are often associated with specific approaches to the crafting and execution
of strategies. The organisation’s purpose and strategy do not just drop out of a process
of discussion, but are actively directed by an individual with strategic vision, whom we
call “strategic leader”.
Strategic leadership establishes the firm’s direction by developing and
communicating a vision of the future and inspiring organisation members to move
in that direction. Unlike managerial leadership which is generally concerned with
the short-term day-to-day activities, strategic leadership is concerned with
determining the firm’s strategy, direction, aligning the firm’s strategy with its
culture, modeling and communicating high ethical standards, and initiating changes
in the firm’s strategy when necessary. The most successful leadership is not just to
define the vision and mission of an organisation in a cold, abstract manner but to
communicate trust, enthusiasm and commitment to strategy.
Example: Bill Gates of Microsoft, Akio Morita of Sony, Jack Welch of General
Electric, Gianni Agnelli of Fiat, Narayana Murthy of Infosys, are all examples of
strategic leaders who have guided and shaped the direction of their companies.
-
219
Notes It is rightly said:
“Visionary leadership inspires the impossible: fiction becomes truth”.

Strategic leadership thus enhances prospects for the organisation’s long-term
success, while at the same time maintaining its short-term financial stability.
12.2.1 Role of a Strategic Leadership
Leaders play a central role in performing six critical and interdependent activities in
implementation of strategies:
Clarifying strategic intent
Setting the direction
Building an organisation
Shaping organisation culture
Creating a learning organisation
Instilling ethical behaviour
Designing
the
a direction organization
Nurturing a culture
dedicated to
excellence
Clarifying strategic intent: Leaders motivate employees to embrace change by

setting forth a clear vision of where the business’s strategy needs to take the
organisation.
Setting the Direction: Leaders set the direction and scope of the organisation
through formulating appropriate corporate and business strategies.
Building the organisation: Since leaders are attempting to embrace change,
they are often required to rebuild their organisation to align it with the ever –
changing environment and needs of the strategy. And such an effort often
involves overcoming resistance to change and addressing problems like the
following:
23 Ensuring a common understanding about organisational priorities
24 Clarifying responsibilities among managers and organisational units
25 Empowering managers and pushing authority lower in the organisation
26 Uncovering and remedying problems in coordination and communication
across the organisation
27 Gaining personal commitment from managers to a shared vision
28 Keeping closely connected with “what’s going on in the organisation”.
Shaping organisational culture: Leaders play a key role in developing and
sustaining a strategy supportive culture. Leaders know well that the values
and beliefs shared throughout their organisation will shape how the work of
the organisation is done. And
220 -
when attempting to embrace accelerated change, reshaping their organisation’s culture is

Notes an activity that occupies considerable time for most leaders.
Creating a learning organisation: Leaders must also play a central role in
creating a learning organisation. Learning organisation is one that quickly
adapts to change. The five elements central to a learning organisation are:
23 Inspiring and motivating people with a mission or purpose
24 Empowering people at all levels throughout the organisation
25 Accumulating and sharing internal knowledge
26 Gathering external information
27 Challenging the status quo to stimulate creativity
Instilling ethical behaviour: Ethics may be defined as a system of right and
wrong. Business ethics is the application of general ethical standards to
commercial enterprises. A leader plays a central role in instilling ethical
behaviour in the organisation.
The ethical orientation of a leader is generally considered to be a key factor in
promoting ethical behaviour among employees. Leaders who exhibit high
ethical standards become role models for others in the organisation and raise
its overall level of ethical behaviour. In essence, ethical behaviour must start
with the leader before the employees can be expected to perform accordingly.
12.2.2 Leadership Approaches
Research has found that some leadership approaches are more effective than
others for bringing about change in organisation. Three types of leadership that can
have a substantial impact are transactional, transformational and charismatic
leadership. These types of leadership are briefly explained below:
Transactional Leadership: Transactional leaders clarify the role and task
requirements of subordinates, initiate structure, provide appropriate rewards,
and try to be considerate to and meet the social needs of subordinates. The
transactional leader’s ability to satisfy subordinates may improve productivity.
Transactional leaders excel at management functions. They are hardworking,
tolerant, and fair minded. They take pride in keeping things running smoothly
and efficiently. Transactional leaders often stress the impersonal aspects of
performance, such as plans, schedules and budgets. They have a sense of
commitment to the organisation and conform to organisational norms and
values. In short, transactional leaders use the authority of their office to
exchange rewards such as pay and status for employees and generally seek to
enhance an organisation’s performance steadily, but not dramatically. In other
words, transactional leadership is important to all organisations, but leading
change requires a different approach, viz. transformational leadership.
Transformational Leadership: Transformational leaders have a special ability to
bring about innovation and change. They encourage the followers to question
the status quo. They have the ability to lead change in the organisation’s
mission, strategy, structure and culture as well as promote innovation in
products and technologies. Transformational leaders do not rely solely on
tangible rules and incentives to control specific transactions with followers.
They focus on intangible qualities such as vision, shared values, and ideas to
build relationships and find common ground to enlist in the change process.
-
221
Charismatic and Visionary Leadership: Charismatic leadership goes

Notes 3. beyond transactional
and transformational leadership. Charisma is a “fire that ignites followers’
energy and
commitment, producing results above and beyond the call of duty”. The
charismatic
leader has the ability to inspire and motivate people to do more than what
they would
normally do, despite obstacles and personal sacrifice. Followers transcend
their own self-
interests for the sake of the leader.
Charismatic leaders are often skilled in the art of visionary leadership. A vision
is an attractive, ideal future that is credible yet not readily attainable.
Visionary leaders see beyond current realities and help followers believe in a
brighter future. They speak to the hearts of their followers, letting them be
part of something bigger than themselves. Thus, visionary leaders have a
strong vision for the future and can motivate others to help realise it. They
have an emotional impact on subordinates because they strongly believe in
the vision and can communicate it to others in a way that makes the vision
real, personal and meaningful to others.
When charismatic and visionary leaders respond to organisational problems,
they can have a powerful, positive influence on organisational performance.
Task Identify some leaders from the corporate world and comment on their style of
leadership.
12.3 Corporate Culture and Strategic Management
A company’s culture is manifested in the values and business principles that

management preaches and practices.
Example: Culture is manifested in:

Corporate stories
Attitudes and behaviours of employees
Core values
Organisation’s politics
Approaches to people management and problem solving
Relationships with stakeholders; and
Atmosphere that permeates its work environment
An organisation’s culture is similar to an individual’s personality. Just as an
individual’s personality influences the behaviour of an individual, the shared
assumptions (beliefs and values) among a firm’s members influence the opinions
and actions within that firm.
Quite often, the elements of company culture originate with a founder or other early
influential leader who articulates the values, beliefs and principles to which the company
should adhere. These elements then get incorporated into company policies, a creed or
value statement, strategies
222 -
and operating practices. Over time, these values and practices become shared by Note
company s
employees and managers. Culture is thus perpetuated as:
1. New leaders act to reinforce them
2. New employees are encouraged to adopt and follow them
3. Stories of people and events told and retold
4. Organisation members are honoured and rewarded for displaying cultural norms.
12.3.1 Influence of Culture on Behaviour
An organisation’s culture can exert a powerful influence on the behaviour of all

employees. It can, therefore, strongly affect a company’s ability to adopt new
strategies. A problem for a strong culture is that a change in mission, objectives,
strategies or policies is not likely to be successful if it is in opposition to the culture
of the company. Corporate culture has a strong tendency to resist change because
its very existence often rests on preserving stable relationships and patterns of
behaviour.
Example: The male-dominated Japanese centered corporate culture of the

giant Mitsubishi Corporation created problems for the company when it
implemented its growth strategy in North America. The alleged sexual harassment
of its female employees by male supervisors resulted in lawsuits and a boycott of
the company’s automobiles by women activists.
There is no one best corporate culture. An optimal culture is one that best supports
the mission and strategy of the company. This means that, like structure and
leadership, corporate culture should support the strategy. Unless strategy is in
complete agreement with the culture, any significant change in strategy should be
followed by a change in the organisation’s culture. Although corporate cultures can
be changed, it may often take long time and requires much effort. A key job of
management therefore involves “managing corporate culture”. In doing so,
management must evaluate what a particular change in strategy means to the
corporate culture, assess if a change in culture is needed and decide if an attempt
to change culture is worth the likely costs.
12.3.2 Creating Strategy Supportive Culture
Once a strategy is established, it is difficult to change. It is the strategy-maker’s

responsibility to select a strategy compatible with the organisation’s prevailing
corporate culture. If it is not possible, once a strategy is chosen, it is the strategy
implementer’s responsibility to change the corporate culture that hinders effective
execution of a chosen strategy.
Changing a Problem Culture
Changing a company’s culture to align it with strategy is one of the toughest

management tasks. This is because the deeply held values and habits are heavily
anchored, and people cling emotionally to the old and familiar. It takes concerted
management action over a period of time to root out certain unwanted behaviours
and instill behaviours that are more strategy-supportive. Changing culture requires
competent leadership at the top. Great power is needed to force major cultural
change, to overcome the spring back resistance of entrenched cultures, and great
power normally resides only at the top.
Changing a problem culture involves the following four steps:
Step 1: Identify facts of present culture that are strategy – supportive and those that are not.
Step 2: Clearly define desired new behaviours and specify key features of “new” culture.
-
223
Notes Step 3: Talk openly about problems of present culture, and how new behaviours will
improve performance.
Step 4: Follow with visible, aggressive actions to modify culture.
Managing Culture Change
As already explained in earlier sections, the culture that an organisation wishes to

develop is conveyed through rites, rituals, myths, legends, actions etc. Only with
bold leadership and concerted action on many fronts can a company succeed in
tackling a major cultural change. Top leadership should play a key role in
communicating the need for a cultural change and personally launching actions to
prod the culture into better alignment with strategy.
Changing culture requires both (a) Symbolic actions and (b) Substantive actions.
They require serious commitment on the part of the top management.
The following measures are helpful in building a strategy supportive culture:
Emphasise key themes or dominant values: Leaders must emphasise
dominant values through internal company communications. They must
repeat at every opportunity the messages of why cultural change is good for
the company.
Stories and legends: Leaders must tell stories, anecdotes and legends in support
of basic beliefs. Organisational members must identify with them, and share
those beliefs and values.
Rewards: Visibly praising and generously rewarding people who display new
cultural norms will slowly change the culture.
Recruiting and hiring: New managers and employees are to be recruited who
have the desired cultural values.
Revising policies and procedures in ways that will help the new culture.
Leading by example: If the organisation’s strategy involves low-cost leadership,
senior management must display in their own actions and decisions,
inexpensive decorations in the executive suites, conservative expense
accounts and entertainment allowances, lean corporate allowances, few
executive perks, and so on.
Ceremonial events: In ceremonial functions, companies must honour individuals
and groups who exhibit cultural norms and reward those who achieve strategic
milestones.
Group gatherings: Top management must participate in employee training
programmes etc. to stress strategic priorities, values, ethical principles and
cultural norms.
Every group gathering must be seen as an opportunity to repeat and ingrain values,
praise good deeds, reinforce cultural norms and promote changes that assist
strategy implementation. Thus, best companies and best executives expertly use
symbols, role models, and ceremonial occasions to achieve the strategy-culture fit.
Managing Culture Clash
When merging or acquiring another company, top management must give some
consideration to a potential clash of corporate cultures. Integrating cultures is a top
challenge to a majority of companies. It is dangerous to assume that the firms can
simply be integrated into the same reporting structures. The greater the gap
between the cultures of the two firms, the faster executives in the acquired firm
quit their jobs, and valuable talent is lost.
224 -
Note
Figure 12.1: Methods of Managing the Culture of an Acquired Firm
s
How much Members of the Acquired Firm

Value Preservation of Their Own Culture
Very Much Not at All
AttractiveNot at All AttractiveVery
Perception of the AttractivenessoftheAcquirer
Integration
Assimilation
Separation
Deculturation
There are four general methods of managing two different cultures. They are: (1)
Integration (2) Assimilation (3) Separation, and (4) Deculturation.
Integration involves merging the two cultures in such a way that separate cultures
of both firms are preserved in the resulting culture.
Assimilation: Here, the acquired firm willingly surrenders its culture and adopts
the culture of the acquiring company.
Separation: Here there is a separation of the two companies’ cultures. They are
structurally separated, without cultural exchange.
Deculturation: This involves imposition of the acquiring firm’s culture forcefully on
the acquired firm. This often results in much confusion, conflict, resentment
and stress.
Example: When AT & T acquired NCR Corporation in 1990 for its computer
business, it replaced NCR managers with AT & T Managers, reorganised sales,
forced employees to adhere to the AT & T code of values called the “Common
Bond” and even changed the name of NCR. The result was that by 1995 AT & T
incurred huge losses, and the NCR unit was put up for sale in 1996.
Case Study
Shaping the Culture at NOKIA
Nokia waspulp
founded in 1865
and paper onwhen engineer
the Nokia Fredrik
River Idestam Although
in Finland. established
Finland, the company was not well known to the rest of the
a mill
Nokia to manufacture
flourished within
world.
In 1985, Ollila joined Nokia and held a variety of key management positions before
moving to the helm of affairs in 1992. His leadership played an important role in
shaping Nokia's culture and led the company's reinvention as a mobile
communications company.
Contd...
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225
Nokia's annual meetings, referred to as the 'Nokia way', were used to exchange
Notes notes and
set priorities. After a brainstorming exercise, top managers defined the
company's vision,
which was communicated to the lower layers of management through formal
presentations.
Nokia's culture was rooted in the Finnish national character-frugal, honest, very
direct,
serious, with little tolerance for "fooling around"-mixed with a good dose of
engineering
culture-"can do," pragmatic, and hands-on. The difficulties that Nokia had faced
before
Ollila became CEO also played their part in shaping the culture.
The most distinctive characteristics of Nokia's organization did not show up on
any
organization chart. When asked to describe the company's organization structure,
Nokia's
managers talked about its flexibility, freedom, and the importance of networks,
rather
than its formal architecture.
While Nokia was not known to pay high compensation, it had been successful in
attracting,
motivating and retaining quality people because it provided these individuals
with plenty
of growth opportunities in a challenging environment.
Nokia had introduced various innovations in its people processes to achieve a
positive
employer image. Nokia believed in providing individuals with a platform for
personal
growth in a challenging environment. Nokia believed in providing equal
opportunities
to people and attempted to shape a culture of respect, openness and trust.
As a result, Nokia, is renowned all over the world for its organizational culture. A
flat,
networked organization along with flexibility and speedy decision-making form
the
main elements of Nokia's culture. Many analysts attribute the success of Nokia in
becoming
world's largest maker of cell phones ahead of rivals such as Motorola, Siemens,
Samsung,
etc., to the culture it follows.
Questions
What do you analyse as the most glaring aspect of Nokia's culture that you
1. are least
likely to find with many companies?
2. Do you think that Nokia benefited financially from its culture? If yes, how?
12.4 Personal Values and Ethics
Values, personal values, and core values all refer to the same thing. They are
desirable qualities, standards, or principles. Values are a person’s driving force and
influence their actions and reactions.
Ethics is defined as “the discipline dealing with what is good and bad, and right
and wrong, or with moral duty and obligation.”
Ethics refers to the moral principles and values that govern the behaviour of a
person or group. Ethics helps us in deciding what is good or bad, moral or immoral,
fair or unfair in conduct and decision-making. In other words, ethics serve as a
“moral compass” to guide our actions.
There are many sources for an individual’s ethics. These include family background,
religious beliefs, community standards and expectations etc.
226 -
Notes
12.4.1 Importance of Ethics
There has been a growing interest in corporate ethics over the past several years.
This is perhaps because of a spate of recent corporate scandals at such firms as
Enron, Tyco, Texaco etc. Without a strong ethical culture, the chances of ethical
crises occurring in companies cannot be ruled out. Due to this, companies face
enormous costs in terms of financial and reputational loss as well as erosion of
human capital and relationships with suppliers, customers, society at large and
governmental agencies.
An ethical organisation is driven by ethical values and integrity. Such values shape
the search for opportunities, the design of systems and the decision-making
processes of the organisation. They provide a common frame of reference that
serves as a unifying force across different functions and employee groups.
Organisational ethics define what a company is and what it stands for.
The potential benefits of an ethical organisation are many. A strong ethical
orientation can have a positive effect on employee commitment and motivation to
excel. This is particularly important in today’s knowledge-intensive organisations,
where human capital is critical in creating value and competitive advantage. An
ethically sound organisation can also strengthen its bonds among its suppliers,
customers and governmental agencies.
The ethical orientation of a leader is generally considered to be a key factor in
promoting ethical behaviour among employees. Leaders who exhibit high ethical
standards become role models for others in the organisation and raise its overall
ethical behaviour. In essence, ethical behaviour must start with the leader, who
plays a central role in instilling ethical behaviour in the organisation.
!
Caution Some may think that ethics is a question of personal scruples. But ethics is
as much an organisational issue as a personal issue. Leaders who fail to provide
leadership in establishing proper systems and controls cannot create an ethical
organisation. Unethical business practices reflect the values, attitudes and
behavioural patterns that define an organisation’s operating culture. Thus ethics
plays a critical role in organisations.
12.4.2 Approaches to Ethics
When an ethical dilemma arises, there are four approaches to guide our action.
These four approaches are:
Utilitarian approach
Individualism approach
Moral – rights approach
Justice approach
Utilitarian Approach
According to this approach, moral behaviour is one that produces the greatest good
for the greatest number.
-
227
Notes Individualism Approach
According to this approach, acts are moral when they promote the individual’s best
long-term interests, which ultimately lead to the greater good.
Moral – Rights Approach
According to this approach, the fundamental rights and liberties should be

respected in all decisions. Thus, an ethically correct decision is one that best
maintains the rights of those people affected by it. Six moral rights should be
considered during decision-making:
Right of free consent
Right of privacy
Right of freedom of conscience
Right of free speech
Right to due process
Right to life and safety
To make ethical decisions, managers need to avoid interfering with the rights of
others.
Justice Approach
According to this approach, moral decisions must be based on equity, fairness and
impartiality. Four types of justices are of concern to managers:
Distributive justice requires that individuals should not be treated differently on
the basis of race, sex, religion or national origin. Individuals who are similar
should be treated similarly. Thus, men and women should not receive different
salaries if they are performing the same job.
Procedural justice requires that rules be administered fairly. Rules should be
clearly stated and be consistently and impartially administered.
Compensatory justice requires that individuals should be compensated for the
cost of their injuries by the party responsible. Moreover, individuals should not
be held responsible for matters over which they have no control.
Natural duty principle: This principle reflects a duty to help others who are in
need or danger; duty not to cause unnecessary suffering; and the duty to
comply with the just rules of an institution.
12.4.3 Building an Ethical Organisation
A firm must have several key elements before it can become a highly ethical
organisation. These elements must be constantly reinforced in order for the firm to
be successful:
Role Models
For good or bad, leaders are role models in their organisation. The values as well as
the character of leaders become transparent to an organisation’s employees
through their behaviour. Leaders must take responsibility for ethical lapses within
the organisation, which enhances the loyalty and commitment of employees
through the organisation.
228 -
Code of Ethics Notes
They are another important element of an ethical organisation. Such mechanisms

provide a statement and guidelines for norms and beliefs as well as decision–
making. They provide employees with a clear understanding of the ethical
standards of the organisation. Many large companies have developed such codes
code of conduct.
Reward and Evaluation Systems
An appropriate reward and evaluation system should consider both the outcomes
and the means adopted to achieve the organisational goals and objectives.
Inappropriate reward systems may cause individuals to commit unethical acts.
Policies and Procedures
Most of the unethical behaviours in organisations could be traced to the absence of

policies and procedures to guide behaviour. It is important to carefully develop
policies and procedures to guide behaviour so that all employees are encouraged to
behave in an ethical manner. However, it is not enough merely to have policies “on
the books”. Rather, they must be effectively communicated, enforced and
monitored. The company should also follow sound corporate governance practices.
Ethics Training
The purpose of ethic training is to encourage ethical behaviour. Companies should

provide appropriate training in ethical standards. It enables managers to align
ethical behaviour with organisational goals.
Ethics Audit
Companies should undertake periodic audits to ensure that proper ethical

standards are being followed by all deportments of the organisation.
Chief Ethics Officer
Some large corporations appoint a senior officer with the exclusive responsibility of
overseeing the ethical conduct of employees. He functions like a watchdog on
ethics.
Ethics Committee
An ethics committee establishes polices regarding ethical conduct and resolves

major ethical dilemmas faced by the employees of an organisation. Ethics
committee performs such functions as organisation of regular meetings to discuss
ethical issues, identifying possible violations of the code, enforcing the code,
rewarding ethical behaviour etc.
Ethics Hotline
This is a special telephone line that enables employees to bypass the proper
channel for reporting their ethical dilemmas and problems. The line is usually
handled by an executive also investigates the matter and helps resolve the
problems of the concerned employees.
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229
Notes
12.5 Social Responsibility and Strategic Management
Corporate social responsibility (CSR) consists of “actions that appear to further

some social good, beyond the interests of the firm” It includes such topics as
environmental ‘green’ issues, treatment of employees and suppliers, charitable
work and other matters related to the community. A brief idea of the areas included
in CSR is given in figure.
Observe ethical principles
Make charitable
Promote Corporate contributions;
community service
workforce Social activities;
diversity Responsibility improve quality of work life
Employee well-being: Protect environment;

healthy and minimize adverse
safework effects on
environment environment.
It is important to note that CSR requires firms to go beyond what the law requires –
just doing the minimum required by the law is not sufficient. “Corporate social
responsibility is concerned with the ways in which an organisation exceeds the
minimum obligations to the stakeholders” (Johnson and Sholes, 2002).
Corporate Social Responsibility is therefore a company’s duty to operate its
business by means that avoid harm to other stakeholders and the environment, and
also to consider overall betterment of society in its decisions and actions. The
essence of socially responsible behaviour is that a company should strive to
balance its actions to benefit its shareholders without any adverse impact on other
stakeholders like employees, suppliers, customers, local communities and society at
large, and, further, to proactively mitigate any harmful effects on the environment
its actions and business may have.
12.5.1 Responsibilities of Business
A business organisation has four responsibilities:

Economic responsibilities: are the most basic responsibilities of a business firm.
This involves the essential responsibility of business to provide goods and
services to society at a reasonable cost. In discharging that economic
responsibility, the company provides productive jobs to its workforce, pays
taxes to central, state and local governments.
Legal responsibilities: reflect the firm’s obligation to comply with the laws that
regulate business activities, especially in the areas of consumer safety and
pollution control.
Ethical responsibilities: reflect the company’s notion of right or proper business
behaviour. Ethical responsibilities go beyond legal requirements. Firms are
expected, though not legally bound, to behave ethically.
Discretionary responsibilities: are those that are voluntarily assumed by business
organisations that adopt the citizenship approach. They support ongoing charities,
public-
230 -
service advertisement campaigns, donations, medical camps, public welfare Note

activities etc. s
A commitment to full corporate responsibility requires strategic managers to attack
social
problems with the same zeal in which they tackle business problems.
Business managers should keep in mind that economic and legal responsibilities are
mandatory,
ethical responsibilities are expected, and discretionary responsibilities are desirable.
The above four responsibilities are listed in order of priority. A business firm must first
make a
profit to satisfy its economic responsibilities. A firm must also follow the laws as a good
corporate citizen. Carrol, however, argues that business firms have obligations beyond
the
economic and legal responsibilities; that firms must also fulfill its social responsibilities.
Social
responsibility includes both ethical and discretionary responsibilities, but not economic
and
legal responsibilities.
12.5.2 Need for CSR: The Strategy
After considering the arguments for and against CSR, it becomes evident that it is in
the enlightened self-interest of companies to be good corporate citizens and devote
some of their resources and energies to employees, the communities in which they
operate, and society in general. There are five important reasons why companies
should undertake social responsibilities.
Self-interest of the Organisation
Every organisation obtains critical inputs from the environment and converts them
into goods and services to be used by society at large. In this process they help
shareholders to get appropriate returns on their investment. It is expected that
organisations acknowledge and act upon the interests and demands of other
stakeholders such as citizens and society in general that are beyond its immediate
constituencies – owners, customers, suppliers and employees. That is, they must
consider the needs of the broader community at large, and act in a socially
responsible way.
It generates Internal Benefits
CSR generates internal benefits like employee recruitment, workforce retention and
training. Companies with good CSR reputation are better able to attract and retain
employees compared to companies with tarnished reputations. Some employees
just feel better about working for a company committed to improving society. This
can contribute to lower turnover and better worker productivity. This also benefits
the firm by way of lower costs for staff recruitment and training. Provision of good
working conditions results in greater employee commitment.
It Reduces Risks
CSR reduces the risk of damage to reputation and increases buyer patronage.
Consumer, environmental and human rights activist groups are quick to criticise
businesses that are not socially responsive. Pressure groups can generate adverse
publicity, organise boycotts, and influence buyers to avoid an offender’s products.
Research has shown that adverse publicity is likely to cause a decline in a
company’s stock price.
In the Best Interest of Shareholders

CSR is in the best interest of shareholders. Well-conceived social responsibility
strategies work to the advantage of shareholders in several ways. Socially
responsible behaviour can help avoid
231
or prevent legal and regulatory actions that could prove costly or burdensome. A
Notes study of
leading companies found that environmental compliance and developing eco-
friendly products
can enhance earnings per share, profitability, and the likelihood of winning
contracts.
It gives Competitive Advantage

Being known as a socially responsible firm may provide a firm a competitive
advantage.
Example: Firms that are eco-friendly enhance their corporate image. In

western countries,
many consumers boycott products that are not “green”. Companies that take the
lead in being
environmentally friendly, such as by using recycled materials, producing ‘green’
products, and
helping social welfare programmes, enhance their corporate image.
In sum, companies that take social responsibility seriously can improve their business
reputation
and operational efficiency while reducing their risk of exposure and encouraging
loyalty and
innovation. Overall, companies that take special pains to protect the environment
(beyond what
is required by law), are active in community affairs, and are generous supporters of
charitable
causes are more likely to be seen as good companies to work for or do business with.
It will also
benefit the shareholders.
Consider any one CSR initiative taken up by any one major corporate
Task house in
India. Do you think there was any strategic objective behind the initiative or was
it purely
philanthropy?
Coca Cola India’s CSR

Caselet Strategy
oca-Cola India being one of the largest beverage companies in India,
realised that
CSR had to be an integral part of its corporate agenda. According to the
company,
was aware of the environmental, social, and economic impact caused
by a
Cit
business of its scale and therefore it had decided to implement a wide range of initiatives
to improve the quality of life of its customers, the workforce, and society
at large.
However, the company came in for severe criticism from activists and
environmental experts who charged it with depleting groundwater resources in
the areas in which its bottling plants were located, thereby affecting the
livelihood of poor farmers, dumping toxic and hazardous waste materials near
its bottling facilities, and discharging waste water into the agricultural lands of
farmers. Moreover, its allegedly unethical business practices in developing
countries led to its becoming one of the most boycotted companies in the
world.
Notwithstanding the criticisms, the company continued to champion various
initiatives such as rainwater harvesting, restoring groundwater resources,
going in for sustainable packaging and recycling, and serving the communities
where it operated. Coca-Cola planned to become water neutral in India by
2009 as part of its global strategy of achieving water neutrality. However,
criticism against the company refused to die down. Critics felt that Coca-Cola
was spending millions of dollars to project a ‘green’ and ‘environment-friendly’
image of itself, while failing to make any change in its operations. They said
this was an attempt at greenwashing as Coca-Cola’s business practices in
India had tarnished its brand image not only in India but also globally.
232 -
Notes
12.6 Summary
A firm’s stakeholders are the individuals, groups, or other organisations that
are affected by and also affect the firm’s decisions and actions.
An organisation needs to have an effective stakeholder management system
in place, which provides a great support in achieving its strategic objectives.
Strategic leadership establishes the firm’s direction by developing and
communicating a vision of the future and inspiring organisation members to
move in that direction.
A company’s culture is manifested in the values and business principles that
management preaches and practices. An organisation’s culture can exert a
powerful influence on the behaviour of all employees.
Ethics refers to the moral principles and values that govern the behaviour of a
person or group. Ethics helps us in deciding what is good or bad, moral or
immoral, fair or unfair in conduct and decision-making.
Corporate social responsibility (CSR) consists of “actions that appear to
further some social good, beyond the interests of the firm” It includes such
topics as environmental ‘green’ issues, treatment of employees and suppliers,
charitable work and other matters related to the community.
Corporate Social Responsibility is a company’s duty to operate its business by
means that avoid harm to other stakeholders and the environment, and also
to consider overall betterment of society in its decisions and actions.
12.7 Keywords
Culture: The beliefs and behaviors that determine how a company’s employees
and management interact and handle outside business transactions.
Corporate Social Responsibility: A company’s sense of responsibility towards
the community and environment (both ecological and social) in which it operates.
Deculturation: The removing or abandoning of one’s own culture and replaces it with another.
Ethics: Motivation based on ideas of right and wrong.
Stakeholders: A person, group, or organisation that has direct or indirect stake in an organisation.
Strategic leadership: A manger’s potential to express a strategic vision for the
organisation, or a part of the organisation, and to motivate and persuade others to
acquire that vision.
Fill in the blanks:

The company must place its stakeholders on a ……………………..based on their level
of influence or impact.
A manager is concerned with short term activities of the organisation, while a
………………..is concerned with the long term aspects.
Strategic leaders must also play a central role in creating a ………………. organisation.
In general, …………………may be defined as a system of right and wrong.
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233
Notes 5. …………………leaders have a special ability to bring about innovation and

change.
Charismatic leaders are often skilled in the art of ………………. leadership.
An organisation’s culture is similar to an individual’s …………………..
When the acquired firm willingly surrenders its culture and adopts the culture of the
acquiring company, it is called…………………of culture.
An ethical organisation is driven by ethical ……………….and …………………...
It is a…………………responsibility of a business to adopt the citizenship approach.
Assess the value of stakeholders in an organsiation. Why is it important to manage

the stakeholders well?
Critically analyse the role of strategic leader vis-à-vis managerial leaders.
“Visionary leadership inspires the impossible: fiction becomes truth”. Substantiate
Discuss the three approaches to leadership. Assess the importance of each of them.
“An organisation’s culture is similar to an individual’s personality.” Comment
“There is no best or worst culture”. Elucidate
Suppose you are the manager of a firm that has just acquired another firm. How will
you ensure that there is good ‘fit’ between the culture and startegy of the new
firm?
What do you mean by problem culture? How will deal with such a culture?
Is it necessary for an organisation to be ethical? Give your viewpoint and justify.
CSR is not an obligation, then why most of the successful companies engage in it?
strategic
1. stakeholder matrix 2. leader
3. learning 4. ethics
5. Transformational 6. visionary
7. personality 8. assimilation
9. values, integrity 10. discretionary
Books Carter McNamara, Organisational Culture, Authenticity Consulting, LLC,

2000.
Collins, James C. and Jerry I. Porras, Built to Last: Successful Habits of
Visionary
Companies, New York: Harper Business, 1994.
Edgar Schein, Jay Shafritz and J. Steven Ott, eds. 2001, Organisational
Culture and
Leadership in Classics of Organisation Theory, Fort Worth: Harcourt College
Publishers, 1993.
234 -
K Cameron & R Quinn, Addison-Wesley, Diagnosing and Changing Note

Organisational s
Culture, 1999.
Online links www.mang.canterbury.ac.nz/course_advice/.../org_dev.

www.new-paradigm.co.uk/Culture.
www.organisationalculturesurvey.com/organisation_culture
www.organisational-leadership.com
-
235
Notes
Unit 13: Functional and Operational
Implementation
CONTENTS
Objectives
Introduction
Functional Strategies
23 Nature of Functional Strategies
24 Need for Functional Strategies
Functional Plans and Policies
Operational Plans and Policies
23 Importance of Operational Strategy
24 Components of Operational Plan and Policies
Personnel (HR) Plans and Strategies
23 HR Planning
24 Staffing
25 Training and Development
26 Performance Management
27 Compensation and Rewards
28 Industrial Relations
Summary
Keywords
Self Assessment
Review Questions
Further Readings
Objectives

Describe functional strategies
Explain the functional plans and policies
State the operational plans and policies
Discuss personnel plans and policies
236 -
Unit 13: Functional and Operational Implementation
Notes
Introduction
Once corporate level and business level strategies are developed, management
must turn its attention to formulating strategies for each functional area of the
business unit. For effective implementation of strategies, functional strategies
provide direction to functional managers regarding the plans and policies to be
adopted in each functional area.
13.1 Functional Strategies
Functional Strategy is the approach taken by a functional area to achieve corporate

and business unit objectives and strategies by maximising resource productivity. It
is concerned with developing and nurturing a distinctive competence to provide a
company or business unit with a competitive advantage. Just as a multi-divisional
corporation has several business units, each with its own business strategy, each
business unit has its own set of departments, each with its own functional strategy.
13.1.1 Nature of Functional Strategies
Functional strategies are essential to implement business strategy. In fact, the

effectiveness of a corporate or business strategy execution depends critically on
the manner in which strategies are implemented at the functional level. The
corporate strategy provides the long-term direction and scope of a firm. The
business strategy outlines the competitive posture of its operations in an industry.
The functional strategy clarifies the business strategy, giving specific short-term
guidance to operating managers in the areas of operations, marketing, finance, HR,
R&D etc., and increases the likelihood of their success.
Orientation of the functional strategy, therefore, depends on the business strategy.
Example: If a business unit follows a differentiation strategy through high

quality products, its production strategy emphasises expensive quality assurance
processes over cheaper, high-volume production; a human resource functional
strategy that emphasises hiring and training of a highly skilled, but costly,
workforce; and a marketing functional strategy that emphasises extensive
advertising to increase demand rather than using marketing incentives to retailers.
Similarly, if the business unit follows a low-cost competitive strategy, a different set
of functional strategies emphasising cost-cutting measures would be needed to
support the business strategy.
13.1.2 Need for Functional Strategies
Functional managers need guidance from the corporate and business strategies in
order to make decisions. In simple terms, functional strategies tell the functional
manager what to do in his area to achieve business objectives.
Glueck and Jauch have suggested five reasons to show why functional strategies
are needed. Functional strategies are developed to ensure that:
The strategic decisions are implemented by all the parts of an organisation.
There is a basis available for controlling activities in different functional areas of a business.
The time spent by functional managers on decision-making may be reduced.
Similar situations occurring in different functional areas are handled by the
functional managers in a consistent manner.
Coordination across different functions takes place where necessary.
-
237
Notes
13.2 Functional Plans and Policies
The process of developing functional plans and policies is quite similar to that of
strategy formulation, with the difference that functional heads are responsible for
their formulation and implementation. Environmental factors relevant to each
functional area will have an impact on the choice of strategies. Finally, the actual
process of choice involves a negotiation between functional managers and business
unit managers. Thus, functional strategies are generally formulated in all key
functional areas.
For each of the functional strategies, a set of policies will have to establish for
appropriate areas of the business. The policies will ensure that the strategies are
carried out as intended and that the different functional areas are working towards
the same ends. Companies have plans and policies that cover nearly every major
aspect of the firm. The firm should have strategies in every major aspect of
business, at least in key functional areas. We will highlight some of the more
important issues for each functional area that need to be addressed in their
respective functional strategies.
The functional strategies should be comprehensive; but at the same time, they
should not leave so much choice to operating mangers that they work sub-
optimally or at cross purposes. At the same time, the functional strategies should
be flexible enough to leave room to managers for responding quickly to situations
and make exceptions for good reasons. The functional strategies required in key
functional areas are outlined below:
Financial Strategy
In the financial management area, the major concern of the strategy relates to the
acquisition and utilisation of funds. Major issues involved are the sources from where the
funds will come, from equity or by borrowing. How much of the borrowing will be short-
term and how much long-term. In terms of usage of funds, the policy decisions would
relate to whether and to what extent funds have to be deployed in fixed assets and
current assets. The long-term or capital investment decisions relate to buying or leasing
the fixed assets. A retrenchment strategy or paucity of funds may compel the
organisation to lease rather than buy. In case of an organisation where capital
investment decisions are decentralised, a “hurdle rate” may be fixed so as to avoid
investment in weaker projects by one division and non-investment by another division.
Cash Flow
Apart from capital budgeting, another consideration in financial strategy which

influences other functional areas is the cash flow. A company may frame bonus and
dividend policies based on availability of cash. In case a company proposes expansion
through internally generated funds, it may reduce bonus and dividend. This is
particularly so when it has formulated ambitious growth strategies which require large
cash. Similarly, if the firm has high risk business, it should have a conservative
debt/equity ratio to guard against heavy interest burden.
The funds position and optimisation orientation of top management also determines
the accounts receivable and payable policies. Financial strategies and policies may
even determine the accounting policies as these affect the profitability, balance-
sheet and hence cash flow through taxes, dividend, bonus etc.
Marketing Strategy
Functional strategies in marketing area are required for marketing – mix decisions,
i.e. the four Ps of marketing, viz. Product design, Product distribution, Pricing and
Promotion aspects of marketing. In terms of specifics, the product decisions relate
to such issues as the variety of
238 -
product (shape, size, model etc.), quality requirements, introduction/withdrawal of Note

products, s
nature of customers etc. Specific policies are also required regarding distribution
channels i.e.
through retailers or direct selling? What would be the spread of distribution network?
Whether
new dealers will be established or old ones developed? The promotion strategies will
relate to
mode of promotion, coverage and nature (corporate, product or brand promotion). Again,
very
clear and specific strategies will have to be made about pricing, etc., full cost or standard
cost
based pricing. Offensive vs. defensive postures also influence pricing policies.
HR Strategy
HR strategy deals with matters like HR planning, recruitment and selection, training
and development, compensation management, performance management, rewards
and incentives etc. What compensation/reward system will be able to attract people
of the desired type to join the organisation so as to meet the task requirements
demanded by the strategy? What strategies are necessary to groom internal people
for new positions? The problem becomes acute in the context of turnaround
strategies. On the one hand, the most competent people leave and the firm finds it
difficult to attract suitable replacements. On the other hand, it faces the problem of
surplus staff. HR strategies for retrenchment, though painful, are quite necessary
but difficult to develop.
Production Strategy
The functions relating to production need strategies relating to quality assurance,

machine utilisation, location of facilities, balancing the line, scheduling of
production, and materials management. The strategy for entering into export
market will dictate a different policy regarding quality of products and maintenance.
Location of facilities may be determined by closeness to market or input supply
points. Decisions must be made to determine whether and how much to make or
buy, on the basis of cost differential, availability, criticality of the item, capacity if
expansion becomes necessary. In case of bought out items, policies regarding
number of suppliers and the criteria for selecting them are necessary.
R&D Strategy
In the area of research and development, functional strategies regarding the nature
of research are necessary. In case of expansion through new product development,
heavy emphasis has to be laid on basic and applied research.
!
Caution On the contrary, for expansion in the same line, research emphasis has to
be on product/process improvement to cut cost and to add value. It may be noted
that in case of basic research the firm should be prepared to commit resources and
wait for outcome for several years. It cannot have basic research unless it is
prepared to commit resources on long-term basis.
Task Consider two Indian firms from the same industry and compare their
functional strategies.
-
239
Notes
Caselet Tata Motors: Banking on Smart Strategies
T ata Motors is an
revenues, Automobile
reportedly, Company
in the in India and
year 2008-2009 was is
14a billions.
very highButearning company. do
its achievements
not stop there. It is among the world’s top automobile companies, reportedly
Its
the 4th largest truck manufacturer.

The question that many may ask is, “What can we learn from such a large
company, with such great profits?” The age old statement, “Success often
leaves traces” may be appropriate to add in this junction.
With 23,000 employees what is notable in Tata Motors approach is the fact
that it’s marketing approach is novel and founded on clear cut internet
marketing guidelines. One only has to go to the Tata Motors website to find
that it integrates multiple media outlets in its marketing approach. From its
use of flash to its sleek website design, the company uses what is essential to
great profits, innovation.
Innovation is simply the process by which companies increase their
profitability in the marketplace by staking out a position that other companies
in the market can’t do. It clears out space in their prospect’s mind as to what
their company is able to offer them that no other company can.
For Tata Motors- excellence in service and presentation- is the perception that
comes to the prospect’s mind, for others it may understanding a customer’s
family needs for a car.
Essentially what Tata Motors has done is they’ve brought a new range of value
to their market by bringing media and technology that have not been
overemphasised by their competitors so that they could carve out an
unshakable space in the minds of their customers and thus lead to increased
sales.
Source: www.prlog.org
13.3 Operational Plans and Policies
Operations management is the core function of any organisation. This function

converts inputs (raw materials, supplies, machines and people) into value added
outputs. Operations management covers all manufacturing processes in an
organisation and includes raw material sourcing, purchasing, production,
distribution and logistics. This function contributes to the organisation’s ability to
add value to the goods and services.
13.3.1 Importance of Operational Strategy
The key to successful survival of an enterprise is how efficiently the production

activity is managed. The two major factors that contribute to business failures are:
obsolescence of the product line and excessive production costs. These factors
themselves have been the outcome of ineffective production Planning.
Operations strategy plays a crucial role in shaping the ultimate success of a firm. It
enables an organisation to make optimal decisions regarding product, production
capacity, plant location, choice of machinery and equipment, maintenance of
existing facilities and host of other aspects of production. Constant review of
production plan aids in maintaining proper balance of capital investment in plant,
equipment and inventory; efficient operation of the production system, product mix,
Quality control; and ensures effective material handling and Planning of facilities.
240 -
Within the broad framework of corporate and business strategies, production strategy helps in Notes
maintaining full co-ordination with marketing and engineering functions to formulate plans to
improve products and services. It calls upon management to keep in constant touch with finance
and personnel to achieve the optimal use of assets, cost control, recruitment of suitable personnel
and management of labour disputes and negotiations.
13.3.2 Components of Operational Plan and Policies
The different components of a production strategy should ideally consist of the following:
Product Mix
A firm should decide about the product mix (how many and what kind of products
to be produced) keeping in view Objectives such as productivity, cost efficiency,
Quality, reliability, flexibility etc.
Capacity Planning
Capacity Planning is the process of forecasting demand and deciding what

Resources will be required to meet that demand. Meclain and Thomas suggested
that capacity Planning involves the following five sequential steps.
Predict future demand and competitive reactions: The firm should forecast
the demand for various products/services as also estimate customer reaction
to the products offered by it. It should also take care of potential
countermoves by competitors.
Translate above estimates into capacity needs: Based on forecasts, the firm
must decide the quantity that can be manufactured keeping input limitations,
such as plant equipment, manpower etc in mind.
Create alternative capacity plans: Depending on what the market might absorb
and what the organisation can produce, management should create
alternative capacity plans for various products/services that are offered to
customers.
Evaluate each alternative: The firm should identify the opportunities and Threats
associated with each alternative, and carefully evaluate in terms of additional
costs involved, payoffs etc.
Select and implement a particular capacity plan: The capacity plan that best
serves organisational Objectives should be selected and implemented.
One of the most vital decisions which has to be made regarding production capacity
is whether the company should build so much capacity to satisfy all demand during
peak periods and keep the production facilities idle during lean periods.
There are some organisations that prefer to build smaller capacity to take care of
normal requirements and meet peak demand by way of imports or subcontracting.
Some organisations employ measures such as off-peak discounts, mail early
campaign, etc. to induce customers to avoid peak periods.
Technology and Facilities Planning
Choosing Machines and Equipments
A strategic decision to be made by a production manager is what type of

equipments the organisation will require for production purposes, how much it will
cost, what will be its operating cost and what services it will render to the
organisation and for how long.
-
241
Notes Choice of equipment for making a particular product essentially depends on the
basic
manufacturing process. The decision-maker must, therefore, familiarise himself with
the
production process to be adopted.
Another consideration in the choice of new equipment for a plant is the type and
degree of
operating skill required and presently available skills within the organisation. Other
factors
worth consideration are the ease with which the equipment can be operated and
the safety
features of the equipment.
Equipment Investment
Acquisition of equipment involves capital expenditure which will have long-term

effects on the
financial position of the company. Hence, before taking a final decision regarding
investment in
a machine, detailed analysis of such investment in terms of cost-benefits must be
made and its
desirability and worthwhileness should be evaluated with the help of internal rate of
return or
net present value method.
The decision to replace the existing machine is equally important to the enterprise.
In this
regard the management has to decide when the replacement should be made and
the best
replacement policy that must be considered while making comparisons between an
existing
unit of equipment and its possible replacement. In order to make a sound economic
comparison,
all the factors must be converted into cost considerations. The rate of return so
obtained is
compared with the cut-off rate to ascertain whether the replacement is
economically viable.
Thus, clear-cut policy guidelines regarding methodology or computation of net
investment
outlay, incremental operating expenditure and income, depreciation, obsolescence,
salvage
value etc. will help management in taking decisions regarding acquisition and/or
replacement
of machines.
Physical Facilities Decisions
Facilities strategy covers plans for location analysis and selection, design and
specifications
including layout of equipment, plant, warehouses and related services. Facilities
Planning deals
with the separate but interrelated costs of material, supplies, manpower, services
and facilities.
Its Mission is to find ways to minimise the aggregate of such costs in making and
distributing
the products at the proper time.
Plant Location
Plant location is essentially an investment decision having long-term significance.

Once a plant
is acquired, it is a permanent asset that cannot readily be sold. The management
may also
contemplate relocation of the plant when business expansion and advanced
technology require
additional facilities to serve new market areas, to produce new products, or simply
to replace
the old, obsolete plants to increase the company’s production capacity.
The selection of an appropriate plant site calls for location study of the region in
which the
factory is to be situated, the community in which it should be placed and finally, the exact site in
the city or countryside.
Plant Building
Once the company has chosen the plant site, due consideration must be given to
providing
physical facilities. A company requiring extensive space will always construct new
buildings.
242 -
On planning a building for the manufacturing facilities, a number of factors will have to be kept Notes
in mind such as nature of the manufacturing process, plant layout and space requirements,
lighting, ventilating, air-conditioning, service facilities and future expansion.
Plant Layout
Plant layout involves the arrangement and location of production machinery, work
centres and auxiliary facilities and activities (inspection, handling of material
storage and shipping) for the purpose of achieving efficiency in manufacturing
products or supplying consumer services. Plant layout should co-ordinate material,
men and machines and achieves the following Objectives:
Facilitate the manufacturing process.
Minimise materials handling.
Maintain flexibility of arrangement and operation.
Maintain high turnover of work-in-process.
Hold down investment in equipment.
Make economical use of building space.
Promote effective utilisation of manpower.
Promote employee convenience, safety and comfort in doing the work.
In designing plant layout a number of factors such as nature of product, volume of
production, Quality, equipment, type of manufacture, building plant site, personnel
and materials handling plan should be kept in view.
Maintenance of Equipment
Maintenance of equipment is an important component of planning consideration. It

is intimately linked with replacement policies. Every manufacturing enterprise
follows some maintenance routine in order to avoid unexpected breakdowns and
thus minimise costs associated with machine down time, possible loss of potential
sales, idle direct and indirect labour delays, customer dissatisfaction from possible
delays in deliveries and the actual cost of repairing the machine.
A number of strategies can be adopted for maintenance of machines and
equipment. Two most important ones are carrying excess capacity and preventive
maintenance.
Excess Capacity
In carrying excess capacity method an organisation carries stand-by capacity, which

is used if trouble occurs. This excess capacity can be whole machines or it can be
major parts or components which ordinarily take time to obtain. Carrying excess
capacity involves cost which must be compared with costs arising out of a slow-
down or a shut-down of a whole series of dependent operations. Therefore, the
decision in this regard is cost trade-offs.
Preventive Maintenance
Preventive maintenance is based on the premise that good maintenance prevents

breakdowns. Preventive maintenance means preventing breakdowns by replacing worn-
out machines or their parts before their breakdown. It anticipates likely difficulties and
does the expected needed
-
243
Notes repairs at a convenient time before the repairs are actually needed. Preventive
maintenance
depends upon the past knowledge that certain wearing parts will need replacement
after a
normal interval of use.
Inventory Management
This is concerned with management of inventory consisting of raw materials, work-

in-process, goods in transit, finished goods etc. Inventory management is a critical
function because substantial money can be locked up in inventory, which can be
put to productive use. There are various techniques that can be used for effective
inventory management.
Economic Order Quantity
ABC analysis
Just-in-time (JIT) Inventory systems etc.
Quality Management
Quality is a major consideration in Production/Operations strategy. By using

techniques like Total quality management (TQM), Six Sigma etc, organisations strive
to produce ‘Zero defect products’ Operations strategy should consist of appropriate
Quality improvement programmes to achieve total Quality in products and services
Task Find out about the quality management practices at McDonalds.
13.4 Personnel (HR) Plans and Strategies
Personnel policies are guides to action. Brewster and Ricbell defined HR policies as
“a set of proposals and actions that act as a reference point for managers in their
dealings with employees”. Management should pay attention to the following
aspects of HR policies:
HR policies must be related to the strategic objectives of the firm.
They should be stated in definite, clear and understandable language.
They should be sufficiently comprehensive and provide yardsticks for future action.
They should be stable enough to assure people that there will not be drastic
overnight changes.
They should be built on the basis of facts and sound judgment.
They should be just, fair and equitable.
They must be reasonable and capable of being accomplished.
Periodic review of HR policies is essential to keep in tune with changing
circumstances.
13.4.1 HR Planning
HR planning is the first key component for developing a human resource strategy. It
involves translating corporate – wide strategic objectives into a workable plan and
serves as a blue-print for all specific HR programmes and policies. It is the process
of analysing and identifying the
244 -
need for and availability of human resources so that the organisation can meet its Note
objectives. It s
helps determine the manpower needs of firms and develop strategies for meting those
needs.
According to Jeffrey Mello, key objectives of HR planning are:

Prevents overstaffing and understaffing.
Ensures the organisation has the right number of employees with the right skills in
the right places and at the right time.
Ensures the organisation is responsive to changes in its environment.
Provides direction and coherence to all HR activities and systems.
Unites the perspectives of line and staff managers.
Facilitates leadership continuity through succession planning.
Although HR planning follows from the strategic plan, the information collected in
the HR planning process contributes to the assessment of internal organisation’s
environment done in strategic planning.
13.4.2 Staffing
Staffing, the process of recruiting applicants and selecting prospective employees,

remains a key strategic area for human resource strategy. Given that an
organisation’s performance is a direct result of the individuals it employs, the
specific strategies used and decisions made in the staffing process will directly
impact the success of the strategic plan.
Recruitment
Recruitment means attracting people to apply for jobs in the organisation. The
strategic issues in recruitment are:
Temporary versus permanent employees
Internal versus external recruiting
When and how extensively to recruit
Methods of recruiting
Selection
Once a sufficient pool of applicants has been received, critical decisions need to be
made regarding applicant screening, methods of selection and placement. The
selection methods should be reliable and valid.
Placement
After selecting a candidate, he should be placed on a suitable job. Placement is an

important human resource activity. If neglected, it may create employee
adjustment problems. An employee placed in a wrong job may quit the organisation
in frustration.
13.4.3 Training and Development
Training and development of employees is a key strategic issue for organisations. It

is the means by which organisations determine the extent to which their human
assets are viable
-
245
Notes investments. Training involves employees acquiring knowledge and skills that they
will be
able to use on the job.
There are two key factors to develop successful training programmes in
organisations. The first
is planning and strategising the training. This involves four distinct steps:
1. Needs assessment
2. The establishment of objectives and measures
3. Delivery of the training
4. Evaluation
The second key factor is to ensure that desired results are achieved or
accomplished. Training needs are to be integrated with performance management
systems and compensation.
13.4.4 Performance Management
An organisation’s long-term success in meeting its strategic objectives rests on

managing employee performance and ensuring that performance measures are
consistent with the strategic needs. One purpose of performance management
systems is to facilitate employee development. A second purpose is to determine
appropriate rewards and compensation, which must be clearly linked to
achievement of strategic goals.
13.4.5 Compensation and Rewards
Organisations face a number of key strategic issues in setting their compensation

and reward policies and programmes. These include:
Compensation relative to the market
Balance between fixed and variable compensation
Appropriate mix of financial and non financial compensation
Developing an overall cost-effective compensation programme that results in high
performance.
In addition to these strategic issues, the fast pace of change and the need for
organisations to respond in order to remain competitive create challenges for all HR
programmes, but particularly for compensation. Organisations should revaluate
their compensation programmes within the context of their corporate strategy and
specific HR strategy to ensure that they are consistent with the necessary
performance measures required by the organisation. Overly rigid compensation
systems inhibit the flexibility needed by the company’s competitive strategies. HR
strategy must encourage creativity to meet strategic objectives. Therefore,
compensation systems must ensure that behaviours that help achieve strategic
objectives are appropriately rewarded.
13.4.6 Industrial Relations
Industrial relations is a key strategic issue for organisations because the nature of the
relationship between employees can have a significant impact on morale, motivation and
productivity. Consequently, how organisations manage the day- to- day aspects of the
employment relationship can be a key variable affecting their ability to achieve strategic
objectives.
246 -
Unionised employees present a number of key strategic challenges for management: Notes
The power base within the organisation is redistributed

Management’s ability to manage workers at their discretion to achieve the
organisation’s strategic objectives will be severely curtailed.
Outside leadership may pose additional challenges to the management.
Unionised work setting can greatly impact the organisation’s cost structure. Since
liberalisation of the Indian economy since 1990s, there is a perceptible change
in the industrial relations scenario of our country. Labour militancy, strikes and
lockouts have reduced drastically. However, in certain sectors of the economy,
especially the government and public sector, there is not much change in the
clout of the unions.
Through appropriate collective bargaining and participative management practices,
industrial relations can be managed effectively. HR strategy must incorporate long-
term plans and programmes to maintain industrial peace for effective
implementation of the business strategy.
Case Study
Does Sincerity Pay?
Rajdhani Tyres
types andLtd (RTL) It
grades. washada 6000
medium-sized tyre400
workers and company, manufacturing
executives on its rolls. tyres of various
The manufacturing division was headed by Ramlal. Shekhar was the Chief Engineer
reporting to Ramlal directly. The division had 400 workers, 20 executives and 40
supervisors.
Baluja joined the manufacturing division four years back as a skilled worker.
He was technically sound, hardworking and performed his duties sincerely. He
was promoted as a supervisor recently.
On Monday, Baluja was taking rounds in the department. It was a routine
inspection and he spotted Raghu doing nothing. Baluja advised Raghu to
concentrate on the job given to him instead of wasting his time. Raghu shot
back saying “You mind your business. I am the senior most in this department.
Don’t think you have become big after your recent promotion.” Other workers
witnessed the exchange of words with interest and finally burst into laughter
when Baluja tried to retort. Encouraged by the favourable response from his
team mates, Raghu retaliated by using unparliamentary words. In frustration,
Baluja had to report the matter to the Chief Engineer, Shekhar. Shekhar took a
serious note of the situation and issued a stern warning to Raghu, ignoring the
fact that Raghu was quite notorious for such incidents in the past as well.
Baluja was able to get along with others in the departments, despite
occasional flare-ups over matters relating to discipline and production targets.
After a two-year stint, Baluja was in the midst of a crisis again.
A worker named Roberts came to duty in a drunken state and was celebrating
his birthday with other colleagues, disrupting work. Even after half an hour the
noise did not subside and Baluja had to intervene and check Roberts to go
back to work and allow others to resume normal duties. Roberts got wild when
he was physically forced to go to his workspot. In a fit of anger, Roberts
resorted to physical abuse and slapped Baluja in front of others. Not content
with this, Roberts reported the matter to the union, alleging verbal as well as
physical abuse from the supervisor, Baluja.
Contd...
-
247
Three days afterwards, Baluja got the shock of his life when he came to know
Notes about this
from another supervisor. After the ugly incident, Baluja had to rush back to his
house for
admitting his son in the local hospital for viral fever. Since Roberts was drunk and
it was
his birthday, Baluja never thought of reporting the matter to his boss.
The union presented a highly fabricated case to the chief of manufacturing,
Ramlal and
demanded immediate disciplinary action against Baluja. Ramlal instructed
Shekhar to
demote Baluja immediately so that he would mend his violent ways of dealing
with
workers. Shekhar advised restraint since this would send wrong signals to other
supervisors
and would demoralise them thoroughly. Shekhar however, fearing a revolt from
the
union, had to demote Baluja.
Unable to swallow the insult to his ego, Baluja resigned immediately thereafter,
citing
personal reasons. Shekhar was quite unhappy with the turn of events and sought
advice
from the personnel manager, Khurana.
Khurana was quick to respond, “Incidents of this nature should help us realise the
importance of picking up people with good interpersonal skills as supervisors
rather than
technical skills. After all, they need to extract work from others, without losing
their cool
even under provocative situations. You see, we can’t put unions in a spot even
when they
are on the wrong side.”
Shekhar: ‘I know people were after Baluja, since he is sincere and hard-working.
He was a
race horse. Others were not. With a little bit of tact, Baluja could have managed
the
situation well.”
Ramlal: “It’s sad to lose people like him. But Shekhar, workers are illiterates and
respond
negatively when you talk tough language. A supervisor should use his brains
rather than
hands while dealing with people. This fellow rubbed shoulders with union people
on the
wrong side previously too. Other supervisors seem to be OK. Be careful in your
selections
from now on.”
Questions
1. What is the main problem in the case?
2. What would you do, if you were in place of Shekhar?
Source: Adapted from IGNOU
13.5 Summary
Functional Strategy is concerned with developing and nurturing a distinctive
competence
to provide a company or business unit with a competitive advantage.
Functional strategies are essential to implement business strategy.
Functional policies will ensure that the strategies are carried out as intended
and that the
different functional areas are working towards the same ends. Companies have
plans and
policies that cover nearly every major aspect of the firm.
Operations strategy plays a crucial role in shaping the ultimate success of a
firm. It enables
an organisation to make optimal decisions regarding product, production
capacity, plant
location, choice of machinery and equipment, maintenance of existing facilities
and host
of other aspects of production.
Personnel policies are guides to action. Brewster and Ricbell defined HR
policies as “a set
of proposals and actions that act as a reference point for managers in their
dealings with
employees”.
248 -
Notes
13.6 Keywords
Capacity Planning: Process of forecasting demand and deciding what Resources
will be required to meet that demand.
Cash flow: The excess of cash revenues over cash outlays in a given period of
time (not including non-cash expenses)
Functional Strategy: Approach taken by a functional area to achieve corporate
and business unit objectives and strategies by maximising resource productivity.
Human Resource Planning: The ongoing process of systematic planning to
achieve optimum use of an organisation's most valuable asset - its human
resources.
Industrial Relations: Interaction between employers, employees, and the
government; and the institutions and associations through which such interactions
are mediated.
Inventory Management: Management of inventory consisting of raw materials,
work-in-process, goods in transit, finished goods etc.
Operations Management: Design, execution, and control of a firm's operations
that convert its resources into desired goods and services, and implement its
business strategy.
Fill in the blanks:

……………….. strategy outlines the competitive posture of its operations in an industry.
………………….. will ensure that the strategies are carried out as intended.
A company often frames bonus and dividend policies based on availability of
……………………….
Marketing strategy includes the decision regarding the four Ps referred to as
the…………………….
Decision related to logistics comes under the purview of……………………..strategy.
Some organisations that prefer to build smaller capacity to take care of normal
requirements, meet peak demand by way of imports or …………………………
Plant location is essentially ………………………. decision that has a long-term significance.
ABC Analysis is a technique used for…………………………….
……………….is the process of recruiting applicants and selecting prospective employees.
The main purpose of performance management systems is to facilitate …………………….
Analyse the importance of functional strategies. Are they more important than
business strategy?
Suppose you are the manager of a newly established garments company. You have
a business strategy ready for you that stresses on competitive positioning and
proper stakeholder management. Draft out a proper functional strategy for
your company, if the objective is to establish a brand name in the long run.
Discuss the functional strategies required in key functional areas of business.
-
249
Notes 4. “Operations management is the core function of any organisation”. Justify

Why is choice of equipments to be used in business a major strategic decision?
“It is necessary to have personnel strategies in place in order to make other
strategies successful.” Comment
Critically analyse staffing and training as strategies decisions.
Evaluate the importance of effective marketing and R&D strategies.
“The key to successful survival of an enterprise is how efficiently the production
activity is managed.” Discuss
How does obsolescence of the product line affect the organisation?
1. Business 2. Policies
3. cash 4. marketing mix
5. operation 6. subcontracting
inventory
7. investment 8. management
employee
9. Staffing 10. development
Azhar Kazmi, Strategic Management and Business Policy, 3rd Edition,

Books Tata McGraw
Hill
C Appa Rao, B Parvathiswara Rao and K Sivaramakrishna, Strategic
Management
and Business Policy, Excel Books
Hill and Jones, Strategic Management: An Integrated Approach, 6th
Edition, Biztanatra/
Cengage
Online links http://www.kulzick.com/funcstrat.htm

http://www.allbusiness.com/business-planning-structures/business-
plans/
2524-1.html
http://www.businessreviewusa.com/business-
features/leadership/human-
resources-guide-effective-hr-strategies
250 -
Unit 14: Strategic Evaluation and
Control
Unit 14: Strategic Evaluation and Note

s
Control
CONTENTS
Objectives
Introduction
Nature of Strategic Evaluation and Control
23 Types of General Control Systems
24 Basic Characteristics of Effective Evaluation and Control

System
Strategic Control
23 Types of Strategic Control
24 Approaches to Strategic Control
Operational Control
23 Setting of Standards
24 Measurement of Performance
25 Identifying Deviations
26 Taking Corrective Action
Techniques of Strategic Control
Role of Organisational Systems in Evaluation
Summary
Keywords
Self Assessment
Review Questions
Further Readings
Objectives

State the nature of strategic evaluation and control
Discuss the concept of strategic control and operational control
Explain the techniques for strategic control
Identify the role of organisational systems in evaluation
-
251
Notes
Introduction
Strategic evaluation and control is the final phase in the process of strategic
management. Its basic purpose is to ensure that the strategy is achieving the goals
and objectives set for the strategy. It compares performance with the desired
results and provides the feedback necessary for management to take corrective
action.
According to Fred R. David, strategy evaluation includes three basic activities (1)
examining the underlying bases of a firm’s strategy, (2) comparing expected results with
actual results, and
(3) taking corrective action to ensure that performance conforms to plans.
Sometime, the best formulated strategies become obsolete as a firm’s external and
internal environments change. Managers should, therefore, identify important
milestones and set strategic thresholds to assist them in knowing the changes in
the underlying assumptions of a strategy and, if necessary alter the basic strategic
direction. The evaluation process thus works as an early warning system for the
organisation.
Strategic evaluation generally operates at two levels – strategic and operational
level. At the strategic level, managers try to examine the consistency of strategy
with environment. At the operational level, the focus is on finding how a given
strategy is effectively pursued by the organisation. For this purpose, different
control systems are used both at strategic and operational levels.
14.1 Nature of Strategic Evaluation and Control
Strategic evaluation and control is defined as the process of determining the

effectiveness of a given strategy in achieving the organisational objectives and taking
corrective actions wherever required. According to Pearce and Robinson, strategic control
is concerned with tracking a strategy as it is being implemented, detecting problems or
changes in its underlying premises, and making necessary adjustments. In contrast to
post-action control, strategic control seeks to guide action on behalf of the strategies,. as
they are taking place and when the end result is still several years off .
Strategic control in an organisation is similar to what the “steering control” is in a
ship. Steering keeps a ship, for instance, stable on its course. Similarly, strategic
control systems sense to what extent the strategies are successful in attaining
goals and objectives, and this information is fed to the decision-makers for taking
corrective action in time. Strategic managers can steer the organisation by
instituting minor modifications or resort to more drastic changes such as altering
the strategic direction altogether. Strategic control systems thus offer a framework
for tracking, evaluating or reorienting the functioning of the firm’s strategy.
14.1.1 Types of General Control Systems
Basically, there are three types of general control systems:

Output control (i.e. control on actual performance results)
Behaviour control (i.e. control on activities that generate the performance)
Input control (i.e. control on resources that are used in performance)
Output Control
Output controls specify what is to be accomplished by focusing on the end result.

This control is done through setting objectives, targets or milestones for each
division, department, section and executives, and measuring actual performance.
These controls are appropriate when specific output measures haven’t been agreed
on. Often rewards and incentives are linked to performance goals.
252 -
Unit 14: Strategic Evaluation and Control
Notes
Example: Sales quotas, specific cost reduction or profit targets, milestones
or deadlines for completion of projects are examples of output controls.
Behaviour Control
Behaviour controls specify how something is to be done. This control is done

through policies, rules, standard operating practices and orders from superiors.
These controls are the most appropriate when performance results are hard to
measure. Rules standardise the behaviour and make outcomes predictable. If
employees follow rules, then actions are performed and decisions handled the same
way time and again. The result is predictability and accuracy, which is the aim of all
control systems. The main mechanisms of behaviour control are:
Operating budgets
Standard operating practices
Rules and procedures
Example: One example of an increasingly popular behaviour control is the ISO

9000 Standards Series on quality management and assurance developed by the
International Standards Association of Geneva, Switzerland. The ISO 9000 series is
a way of documenting a company’s quality operations, and strictly complying with
it. Many corporations worldwide view ISO 9000 certification as assurance that the
firm sells quality products.
Input Control
Input controls specify the amount of resources, such as knowledge, skills, abilities,
of employees to be used in performance. These controls are most appropriate when
output is difficult to measures.
14.1.2 Basic Characteristics of Effective Evaluation and Control System
Effective strategy evaluation systems must meet several basic requirements. They must be:
Simple: Strategy evaluation must be simple, not too comprehensive and not too
restrictive. Complex systems often confuse people and accomplish little. The
test of an effective evaluation system is its simplicity not its complexity.
Economical: Strategy evaluation activities must be economical. Too many controls
can do more harm than good.
Meaningful: Strategy evaluation activities should be meaningful. They should
specifically relate to a firm’s objectives. They should provide managers with
useful information about tasks over which they have control and influence.
Timely: Strategy evaluation activities should provide timely information. For
example, when a firm has diversified into a new business by acquiring another
firm, evaluative information may be needed at frequent intervals. Time
dimension of control must coincide with the time span of the event being
measured.
Truthful: Strategy evaluation should be designed to provide a true picture of what
is happening. Information should facilitate action and should be directed to
those individuals who need to take action based on it.
Selective: The control systems should focus on selective criteria like key important
factors which are critical to performance. Insignificant deviations need not be
focused.
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253
Strategic
Management
Notes 7. Flexible: They must be flexible to take care of changing circumstances.

Suitable: Control systems should be suitable to the needs of the organisation.
They must conform to the nature and needs of the job and area to be
controlled.
Reasonable: Control standards must be reasonable. Frequent measurement and
rapid reporting may frustrate control.
Objective: A control system would be effective only if it is unbiased and
impersonal. It should not be subjective and arbitrary. Otherwise, people may
resent them.
Acceptable: Controls will not work unless they are acceptable to those who apply
them.
Foster Understanding and Trust: Control systems should not dominate
decisions. Rather they should foster mutual understanding, trust and common
sense. No department should fail to cooperate with another in evaluating and
control of strategies.
Fix Responsibility for Failure: An effective control system must fix responsibility
for failure. Detecting deviations would be meaningless unless one knows
where they are occurring and who is responsible for them. Control system
should also pinpoint what corrective actions are needed.
There is no ideal strategy evaluation and control system. The final design depends on
the unique characteristics of an organisation’s size, management style, purpose,
problems and strengths.
14.2 Strategic Control
Strategic control is a type of “steering control”. We have to track the strategy as it

is being implemented, detect any problems or changes in the predictions made,
and make necessary adjustments. This is especially important because the
implementation process itself takes a long time before we can achieve the results.
Strategic controls are, therefore, necessary to steer the firm through these events.
14.2.1 Types of Strategic Control
There are four types of strategic controls:

Premise control
Strategic surveillance
Special alert control
Implementation control
Premise Control
Strategy is built around several assumptions or predictions, which are called

planning premises. Premise control checks systematically and continuously whether
the assumptions on which the strategy is based are still valid. If a vital premise is
no longer valid, the strategy may have to be changed. The sooner these invalid
assumptions are detected and rejected, the better are the chances of changing the
strategy. The premise control is concerned with two types of factors:
Environmental factors
Industry factors
Environmental Factors: The performance of a firm is affected by changes in
environmental factors like the rate of inflation, change in technology, government
regulations, demographic and social changes etc. Although the firm has little or no
control over
254 -
environmental factors, these factors have considerable influence over the success Note
of the s
strategy because strategies are generally based on key assumptions about them.
Example: A firm may assume massive increase in demand, and embark on an

expansion
plan. If suddenly there is recession and demand for the products of the firm fall down, it
may
have to change its strategic direction.
Industry Factors: Industry factors also affect the performance of a company.
Competitors, suppliers, buyers, substitutes, new entrants etc. are some of the
industry factors about which assumptions are made. If any of these
assumptions go wrong, strategy may have to be changed.
Strategic Surveillance
Strategic surveillance is a broad-based vigilance activity in all daily operations both

inside and outside the organisation. With such vigilance, the events that are likely
to threaten the course of a firm’s strategy can be tracked. Business journals, trade
conferences, conversations, observations etc. are some of the information sources
for strategic surveillance.
Special Alert Control
Sudden, unexpected events can drastically alter the course of the firm’s strategy.
Such events trigger an immediate and intense reconsideration of the firm’s
strategy.
Example: The tragic events of September 11, 2001, created havoc in many US
companies, especially the airline and hotel industry. Sudden acquisition of a leading
competitor or an unexpected product difficulty (like defective tyres of Firestone) etc.
may shatter a firm’s strategy and require a rapid reconsideration of the strategy.
Generally, firms develop contingency plans along with crisis teams to respond to
such sudden, unexpected events.
Implementation Control
Strategy implementation takes place as a series of steps, programmes, investments

and moves that occur over an extended period of time. Resources are allocated,
essential people are put in place, special programmes are undertaken and
functional areas initiate strategy related activities. Implementation control is aimed
at assessing whether the plans, programmes and policies are actually guiding the
organisation towards the predetermined objectives or not. Implementation control
assesses whether the overall strategy should be changed in the light of the results
of specific units and individuals involved in implementation of the strategy. Two
important methods to achieve implementation control are:
Monitoring strategic thrusts
Milestone reviews
Monitoring Strategic Thrusts: Strategic thrusts are small critical projects that
need to be done if the overall strategy is to be accomplished. They are critical
factors in the success of strategy.
One approach is to agree early in the planning process on which thrusts are
critical factors in the success of the strategy. Managers responsible for these
-implementation controls will single them out from other activities and observe
them frequently. Another approach is to use stop/go assessments that are-
linked to a series of these thresholds (time, costs, success etc.) associated
with a particular thrust.
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255
Milestone Reviews: Milestones are critical events that should be reached

Notes 2. during strategy
implementation. These milestones may be fixed on the basis of.
(a) Critical events
(b) Major resource allocations
(c) Time frames etc.
Premise Control
Special Alert Control
Implementation Control
Strategy
Formulation Strategy Implementation
Time
Time 1 Time 2 3
Network controls like PERT/CPM for project implementation are examples of
milestone reviews. After doing a milestone review, managers often undertake a full
scale reassessment of the strategy to decide whether to continue or refocus the
firm’s strategy.
Implementation control is also done through operational control systems like
budgets, schedules, key success factors etc.
The major characteristics of the above four types of strategic control are
summarised in figure.
Strategic controls are, thus, designed to systematically and continuously monitor

the implementation of the strategy over long periods to decide whether the
strategic direction should be changed in the light of unfolding events. However, for
post-action evaluation and control over short periods, the firm needs operational
controls.
256 -
Notes
14.2.2 Approaches to Strategic Control
According to Dess, Lumpkin and Taylor, there are two approaches to strategic control.
Traditional Approach
Traditional approach to strategic control is sequential:

Strategies are formulated and top management sets goals
Strategies are implemented
Performance is measured against goals
Corrective measures are taken, if there are deviations.
Control is based on a feedback loop from performance measurement to strategy
formulation. This process typically involves lengthy time lags and often tied to a
firm’s annual planning cycle. This reactive measure is not sufficient to control a
strategy. As already explained, this is because a strategy takes a long period for
implementation and to produce results. The uncertain future requires continuous
evaluation of the planning premises and strategy implementation. There is a better
contemporary approach for strategic control.
Contemporary Approach
Under this approach, adapting to and anticipating both internal and external
environment change is an integral part of strategic control.
This approach addresses the assumptions and premises that provide the foundation
for the strategy. The key question addressed here is: do the organisation’s goals
and strategies still fit within the context of the current environment?
This involves two key actions:
Managers must continuously scan and monitor the external and internal environment
Managers must continuously update and challenge the assumptions underlying the
strategy.
This may even need changes in the strategic direction of the firm.
While strategic control requires the contemporary approach, operational control is
generally done through traditional approach.
Task Indentify some control practices used in top companies in India.
14.3 Operational Control
Operational control provides post-action evaluation and control over short periods.
They involve systematic evaluation of performance against predetermined objectives.
The major differences between strategic control and operational control are summarised
in Table 14.1.
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257
Notes Table 14.1: Differences between Strategic Control and Operational

Control
Attribute Strategic control Operational control

1. Basic question “Are we moving in the right “How are we performing?”
direction?”
Proactive continuous Allocation and use of
2. Aim questioning orgnisational
of the basic direction of
strategy resources
3. Main concern “Steering” the orgnisation’s Action control
future direction
4. Focus External environment Internal orgnisation
5. Time horizon Long-term Short-term
Exclusively by top
6. Exercise of control management, Mainly by executives of middle-
level management on the
may be through lower-level direction
support of top management
7. Main techniques Environmental scanning, Budgets, schedules and MBO
information gathering,
questioning and review
To be effective, operational control systems, involve four steps common to all post-
action controls:
Set standards of performance
Measure actual performance
Identify deviations from standards set
Initiate corrective action
14.3.1 Setting of Standards
The first step in the control process is setting of standards. Standards are the
targets against which the actual performance will be measured. They are broadly
classified into quantitative standards and qualitative standards.
Quantitative
These are expressed in physical or monetary terms in respect of production,

marketing, finance etc. They may relate to:
Time standards
Cost standards
Productivity standards
Revenue standards
Qualitative
Qualitative criteria are also important in setting standards. Human factors such as
high absenteeism and turnover rates, poor production quality or low employee
satisfaction can be the underlying causes of declining performance. So, qualitative
standards also need to be established to measure performance.
258 -
Notes
14.3.2 Measurement of Performance
The second step in operational control is the measurement of actual performance.

Here, the actual performance is measured against the standards fixed. Standards of
performance act as the benchmark against which the actual performance is to be
compared. It is important, however, to understand how the measurement of
performance actually takes place. Operationally measuring is done through
accounting, reporting and communication systems. A variety of evaluation
techniques are used for this purpose, which are explained in the next section. The
other important aspects of measurement relates to:
Difficulties in Measurement
There are several activities for which it is difficult to set standards and measure performance.
Example: Performance of a worker in terms of units produced in a day, week or

month can easily be measured. On the other hand, it is not easy to measure the
contribution of a manager or to assess departmental performance. The solution lays
in developing verifiable objectives, stated in quantitative and qualitative terms,
against which performance can be measured.
Timing of Measurement
Timing refers to the point of time at which measurement should take place. Delay in
measurement or measuring before time can defeat the very purpose of
measurement. So measurement should take place at critical points in a task
schedule, which could be at the end of a definable activity or the conclusion of a
task.
Example: In a project implementation schedule, there could be several critical

points at which measurement would take place.
Periodicity in Measurement
Another important issue in measurement is “how often to measure”, Generally,

financial statements like budgets, balance-sheets, and profit and loss accounts are
prepared every year. But there are certain reports like production reports, sales
reports etc. which are done on a daily, weekly, monthly basis.
14.3.3 Identifying Deviations
The third step in the control process is identifying deviations.

The measurement of actual performance and its comparison with standards of
performance determines the degree of deviation or variation between actual
performance and the standard. Broadly, the following three situations may arise:
The actual performance matches the standards
The actual performance exceeds the standards
The actual performance falls short of the standards
The first situation is ideal, but sometimes may not be realistic. Generally, a range of
tolerance limits within which the results may be accepted satisfactorily, are fixed
and deviations from it are considered as variance.
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259
Strategic
Management
Notes The second situation is an indication of superior performance. If exceeding the

standards is
considered unusual, a check needs to be made to test the validity of tests and the
measurement
system.
The third type of situation, which indicates shortfall in performance, should be taken
seriously
and strategists need to pinpoint the areas where the performance is below standard
and go into
the causes of deviation.
The analysis of variance is generally presented in a format called ‘variance chart’
and submitted
to the top management for their evaluation. After noting the deviations, it is
necessary to find
the causes of deviation, which can be ascertained through the following questions:
(Thomas)
1. Is the cause of deviation internal or external?
2. Is the cause random or expected?
3. Is the deviation temporary or permanent?
Analysis of variance leads to a plan for corrective action.
14.3.4 Taking Corrective Action
The last and final step in the operational control process is taking corrective action.
Corrective
action is initiated by the management to rectify the shortfall in performance.
If the performance is consistently low, the strategists have to do an in depth
analysis and
diagnosis to isolate the factors responsible for such low performance and take
appropriate
corrective actions.
There are three courses for corrective action:
1. Checking performance
2. Checking standards
3. Reformulating strategies, plans and objectives.
Checking Performance
Performance can be affected adversely by a number of factors such as inadequate

resource allocation, ineffective structure or systems, faulty programmes, policies,
motivational schemes, inefficient leadership styles etc. Corrective actions may
therefore include the change in strategy, systems, structure, compensation
practices, training programmes, redesign of jobs, replacement of personnel, re-
establishment of standards, budgets etc.
Checking Standards
When there is nothing significantly wrong with performance, then the strategist has
to check the standards. A manager should not mind revising the standards when
the standards set are unreasonably low or high level. Higher standards breed
discontentment and frustration. Low standards make employee unproductive. So,
standards check may result in lowering of standards if it is concluded that
organisational capabilities do not match the performance requirements. It may also
lead to elevation of standards if the conditions have improved to allow better
performance. For example, better equipment, improved systems, upgraded skills
etc. need modification in existing standards.
260 -
Reformulating Strategies, Plans and Objectives Notes
A more radical and infrequent corrective action is to reformulate strategies, plans and
objectives. Strategic control, rather than operational control, generally leads to changes
in strategic direction, which will take the strategist back to the process of strategy
formulation and choice.
Techniques like total quality management (TQM) and ISO 9000 standards series are
examples of very good control mechanisms. These are explained in exhibits 40.3.
and 40.4 respectively.
Notes TQM is a management philosophy that aims at total customer satisfaction

through continuous improvement of all organisational processes. The main
elements of TQM are:
Intense focus on the customer: The customer includes not only outsiders
but also internal customers.
Concern for continuous improvement: TQM is committed to improve
quality continuously.
Improvement in the quality of everything the organisation does: TQM
relates not only to the final product but also how the organisation
handles deliveries, responds to complaints etc.
Accurate measurement: TQM uses statistical techniques to measure every
critical performance variable in the organisation’s operations. These
performance variables are then compared against standards or
benchmarks to identify problems. The problems are traced to their roots,
and causes are eliminated.
Empowerment of Employees: TQM involves all the employees in the
improvement process. Teams are widely used in TQM programmes as
empowerment vehicles for finding and solving problems.
14.4 Techniques of Strategic Control
Organisations use many techniques or mechanisms for strategic control. Some of

the important mechanisms are:
Management Information systems: Appropriate information systems act as an
effective control system. Management will come to know the latest
performance in key areas and take appropriate corrective measures.
Benchmarking: It is a comparative method where a firm finds the best practices in
an area and then attempts to bring its own performance in that area in line
with the best practice. Best practices are the benchmarks that should be
adopted by a firm as the standards to exercise operational control. Through
this method, performance can be evaluated continually till it reaches the best
practice level. In order to excel, a firm shall have to exceed the benchmarks.
In this manner, benchmarking offers firms a tangible method to evaluate
performance.
Balanced scorecard: It is a method based on the identification of four key
performance measures i.e. customer perspective, internal business
perspective, innovation and learning perspective, and the financial
perspective. This method is a balanced approach to performance
measurement as a range of financial and non-financial parameters are taken
into account for evaluation.
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261
Notes
Notes What is Balanced Scorecard?
The Balanced Scorecard method is a strategic approach and performance

management system that enables the organisations to translate its vision and
strategy into implementation. The Balanced Scorecard is a conceptual
framework for translating an organization's vision into a set of performance
indicators distributed among four perspectives: Financial, Customer, Internal
Business Processes, and Learning and Growth. Indicators are maintained to
measure an organization's progress toward achieving its vision. Other
indicators are maintained to measure the long term drivers of success.
Through this scorecard, an organization monitors both its current performance
(finances, customer satisfaction, and business process results) and its efforts
to improve processes, motivate and educate employees, and enhance
information systems - its ability to learn and improve. A Balanced Scorecard
enables us to measure not just how we have been doing, but also how well we
are doing ("current indicators" and can expect to do in the future ("leading
indicators"). This in turn gives us a clear picture of reality.
The Balanced Scorecard is a way of:
Measuring organizational, business unit's or department's success
Balancing long-term and short-term actions
Balancing different measures of success
23 Financial
24 Customer
25 Internal Operations
26 Human Resource System & Development (learning and
growth) Four Kinds of Measures
The scorecard seeks to measure a business from the following perspectives:
Financial perspective: Measures reflecting financial performance, for
example, number of debtors, cash flow or return on investment. The
financial performance of an organization is fundamental to its success.
Even non-profit organisations must make the books balance. Financial
figures suffer from two major drawbacks
Customer perspective: This perspective captures the ability of the
organization to provide quality goods and services, effective delivery,
and overall customer satisfaction for both Internal & External customers.
For example, time taken to process a phone call, results of customer
surveys, number of complaints or competitive rankings.
Business Process perspective: This perspective provides data regarding
the internal business results against measures that lead to financial
success and satisfied customers. To meet the organizational objectives
and customers expectations, organizations must identify the key
business processes at which they must excel. Key processes are
monitored to ensure that outcomes are satisfactory. Internal business
processes are the mechanisms through which performance expectations
are achieved. For example, the time spent prospecting new customers,
number of units that required rework or process cost.
Contd...
262 -
4. Learning and Growth perspective: This perspective captures the ability of employees,
Notes information systems, and organizational alignment to manage the business and
adapt to change. Processes will only succeed if adequately skilled and
motivated employees, supplied with accurate and timely information, are
driving them. In order to meet changing requirements and customer
expectations, employees are being asked to take on dramatically new
responsibilities that may require skills, capabilities, technologies, and
organizational designs that were not available before. It measures the
company's learning curve for example, number of employee suggestions
or total hours spent on staff training.
Objectives, Measures, Targets and Initiatives
Within each of the balanced scorecard financial customer, internal process,
and learning perspectives, the organisation must define the following:
Strategic objectives - the strategy for achieving that perspective.
Measures - how progress for that particular objective will be measured.
Targets - the target value sought for each measure
Initiatives - what will be done to facilitate reaching out the target.
The balanced scorecard provides an inter-connected model for measuring
performance and revolves around four distinct perspectives - financial,
customer, internal processes, and innovation and learning. Each of these
perspectives is stated in terms of the organisation's objectives, performance
measures, targets, and initiatives, and all are harnessed to implement
corporate vision and strategy.
The name also reflects the balance between the short-and long-term
objectives, between financial and non-financial measures, between lagging
and leading indicators and between external and internal performance
perspectives.
Under the balance scorecard system, financial measures are the outcome, but
do not give a good indication of what is or will be going on in the organization.
Measures of customer satisfaction, growth and retention is the current
indicator of company performance, and internal operations (efficiency, speed,
reducing non-value added work, minimizing quality problems) and human
resource systems and development are leading indicators of company
performance.
Robert S Kaplan and David P Norton the architects of the balanced scorecard
approach, recognized early that long-term improvement in overall
performance was unlikely to happen through technology only and hence
placed greater emphasis on organizational learning and growth. These, in turn,
consist of the integrated development of employees, information, and systems
capabilities.
Context and Strategy
Just as financial measures have to be put in context, so does measurement
itself. Without a tie to a company strategy, more importantly, as the measure
of company strategy, the balanced scorecard is useless. A mission, strategy
and objectives must be defined. Measures of that strategy must be agreed
upon to and actions need to be taken for a measurement system to be fully
effective. Otherwise, it will appear as if the organisation is standing at a
crossroad but unaware of which path to take.
Contd...
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263
Notes Purpose of the Balanced Scorecard

Kaplan and Norton found that organisations are using the scorecard to:
1. Clarify and update strategy
2. Communicate strategy throughout the company
3. Align unit and individual goals with strategy
4. Link strategic objectives to long term targets and annual budgets
5. Identify and align strategic initiatives
6. Conduct periodic performance reviews to learn about and improve strategy.
The Process of Building a Balanced Scorecard

Kaplan and Norton suggest following four step process for building a scorecard:
1. Define the measurement architecture
2. Specify strategic objectives
3. Choose strategic measures
4. Develop the implementation plan
Benefits of Balanced Scorecard

Some of the benefits include:
1. Translation of strategy into measurable parameters
2. Communication of the strategy to all stakeholders
3. Alignment of individual goals with the organisation's strategic objectives
4. Feed-back of implementation results to the strategic planning process

Preparing the organisation for the Change - It provides for a front-end
5. justification
as well as a focus and integration for the continuous improvement, re-
engineering
and transformation process
Balanced Scorecard for Enhancing Performance
In such constantly shifting environments, management must learn to
continuously adapt to new strategies that can emerge from capitalizing on
opportunities or countering threats. A properly constructed balanced
scorecard can provide management with the ideal tool in reacting to the
turbulent environment and helping the organisation to correct the course to
success.
Scorecard provides managers with feedback, thus, enabling them to monitor and
adjust the implementation of their strategy - even to the extent of changing the
strategy itself. In today's information age, organisations operate in very turbulent
environments. Planned strategy though initiated with the best of intentions and
with the best available information at the time of planning may no longer be
appropriate or valid for contemporary conditions.
As companies have applied the balanced scorecard, they have begun to
recognize that the scorecard represents a fundamental change in the
underlying assumptions about performance measurement.
The scorecard puts strategy and vision, not control, at the centre. It
establishes goals but assumes that people will adopt whatever behaviours and
take whatever actions are
Contd...
264 -
Note
necessary to arrive at those goals. The measures are designed to pull people s
toward the
overall vision. Senior managers may know what the end result should be, but they
cannot
tell employees exactly how to achieve that result, because the conditions in which
employees
operate are constantly changing.
This new approach to performance measurement is consistent with the initiatives
under
way in many organisations: cross-functional integration, customer supplier
partnerships,
global scale, continuous improvement, and team rather than individual
accountability.
By combining the financial, customer, internal process and innovation, and
organizational
learning perspectives, the balanced scorecard helps managers understand, at least
implicitly,
many interrelationships. This understanding can help managers transcend
traditional
notions about functional barriers and ultimately lead to improved decision making,
problem solving and enhanced performance. The balanced scorecard keeps
organisations
moving forward.
Key factor rating: It is a method that takes into account the key factors in several
areas and then sets out to evaluate performance on the basis of these. This is
quite a comprehensive method as it takes a holistic view of the performance areas
in an organisation.
Responsibility Centres: Control systems can be established to monitor specific
functions, projects or divisions. Responsibility centers are used to isolate a unit
so that it can be evaluated separately from the rest of the corporation. There
are five major types of responsibility centers: Cost centres, Revenue centres,
Expense centres, Profit centres and Investment centres. Each responsibility
centre has its own budget and is evaluated on the basis of its performance.
Network techniques: Network techniques such as Programme Evaluation and
Review Technique (PERT), Critical Path Method (CPM), and their variants, are
used extensively for the operational controls of scheduling and resource
allocation in projects. When network techniques are modified for use as a cost
accounting system, they become highly effective operational controls for
project costs and performance.
Management by Objectives (MBO): It is a system proposed by Drucker, which is
based on a regular evaluation of performance against objectives which are decided
upon mutually by the superior and the subordinate. By the process of consultation,
objective-setting leads to the establishment of a control system that operates on
the basis of commitment and self-control. Thus, the scope of MBO to be used as an
operational control is quite extensive.
Memorandum of Understanding: This is an agreement between a PSU and the
administrative ministry of the government in which both specify their respective
commitments and responsibilities. The system works as an effective control on the
performance of the PSU.
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265
Notes
Caselet Balanced Scorecard: A Concept for the Future
WHY is it difficult for successful companies to remain so on a continuous basis?

Is it because companies only focussed on the financial numbers?
Yes, says Dr Anil Naik, a consultant and an expert on this concept called
`Balanced Scorecard'. "Balanced Scorecard gives a picture of the future," says
Dr Naik. "There were many successful companies like Nirlon, Paragon Textiles,
Mafatlal in the past. Where are they now? They failed because they could not
devise proper strategy for the future," Dr Naik told Business Line on the
sidelines of a seminar organised by Indian Electrical and Electronics
Manufacturers' Association (IEEMA) here recently.
`Balanced', as the name suggests, calls for a balance between financial and
non-financial measure, long term and short-term objectives and external and
internal performance. `Scorecard' initially came into being as a measurement
system, and gradually evolved into a core management system.
Dr Naik said Balanced Scorecard continues to emphasise on the financial
performance measure but at the same time highlights future performance
drivers, key initiatives to be taken and provides a framework for strategic
management. It has been designed around four perspectives - financial,
customer, internal and learning and growth.
In Balanced Scorecard, financial perspective is always important. But a healthy
revenue growth, proper utilisation of assets and investment strategy are also
must for any organisation. Balanced Scorecard articulates customer and
market-based strategy that will deliver super value to customer, build
customer loyalty and bring superior financial results. It specifically looks at the
value proposition that the organisation will deliver to the customer in target
market segment. It propagates building better understanding and leveraging
relationship with customers.
Source: thehindubusinessline.com
14.5 Role of Organisational Systems in Evaluation
There are six types of organisational system involved in evaluation.
Information System
Organisations evaluate by comparing actual performance with standards. Purpose

of information management system is to enable managers to keep the track of
performance through control reports. Whether strategic surveillance or financial
analysis, are based on information system to provide relevant & timely data to
managers to allow them to evaluate performance & strategy & initiate corrective
action
Control System
The control system is core of any evaluation process & is used for setting standards,
measuring performance, analysing variances, & taking corrective action.
266 -
Appraisal System Notes
This is the system that actually evaluates performance. When measuring the
performance of managers, it is contribution to the organisational objectives which
is sought to be measured. The evaluation process through appraisal system,
measure the actual performance and provides for the control system to work.
Motivation System
The primary role of the motivation system is to induce strategically desirable

behavior so that managers are encouraged to work towards the achievement of
organisational objectives. This system plays an important role in ensuring that
deviations of actual performance with standards. Performance checks, which are a
feedback in the evaluation process, are done through the motivation process.
Development System
The development system prepares the managers for performing strategic &
operational tasks. Among the several aims of development, the most important is
to match a person with the job to be performed. This in other words is matching
actual performance with standards. This matching can be done provided it is known
what a manager is required to do and what is deficient in terms of knowledge, skills
& attitude. Such a deficiency is located through the appraisal system. The role of
development system in evaluation is to help the strategists to initiate & implement
corrective action.
Planning System
The evaluation process also provides feedback to planning systems for the
reformulation of strategies, plans & objectives. Thus planning system closely
interacts with the evaluation process on a continual basis.
Case Study
Global Automotive Giants – Toyota, GM and Ford
I n March 2004, the Japanese automotive company Toyota announced that it had sold 6.78
millions cars and trucks around the world in the year 2003. This total was 60,000 higher than
the American company Ford. It was the first time ever that Toyota had beaten Ford. It made
Toyota second only to the American company General Motors in world automotive sales. (By
the time this case goes to the press, Toyota might have
surpassed even GM). This case explores competition in the global automotive industry.
Toyota Strategy – Stand Alone
In around 2000, Toyota identified its purpose to take over global market leadership
by 2010. It called this its ‘2010 Global Vision Strategy’. During the 1980s and
1990s, the company targeted North America as its prime strategic focus. Along
with Honda, Toyota launched cars of superior quality and with lower manufacturing
costs than its US competitors. During the years 1991-2002, the main three US
companies GM, Ford and DaimlerChrysler lost over 21 percentage share points of
the American car market to Japanese and European
Contd...
267
competition. The combined losses of the three major US companies in 1991

Notes alone were
US$7.5 billions. The US car manufacturers were only saved by three changes:
The launch of specialist vehicles – like sports utility vehicles, minivans and
1. pickups;
A severe economic recession in Japan, which made Toyota’s Japanese
2. home base
difficult;
A substantial rise in the Japanese yen, which made Japanese exports to
3. the US less
profitable.
GM has been enormously successful in the light truck business and the secular
market share losses have occurred in the passenger car business, where the
Europeans and Japanese have been the strongest. Nevertheless by 2003,
Toyota was selling the most popular single car model – the Camry – in North
America. Toyota also now produces many of its basic models in North America
so it is unlikely to be affected again by changes in the Japanese yen. Toyota
now has six manufacturing plants in North America that produce over 1.2
millions units per year. It has announced plans for Mexican and Texan plants in
the years 2005 and 2006. The company has now become a major employer in
North America and is not merely outsourcing work to Japan.
In the 1990s, Toyota decided to attack the Western European market, which is
the next largest market in the world. They had been selling vehicles in Europe
for many years but decided to build their first factory – at Burnaston in the UK
– in 1995. This was then followed by other factories and a design facility in
France in the late 1990s. Toyota was cautious about Europe for many years for
two reasons: first, because the European vehicle industry was protected by
trade barriers; and, second, by a voluntary agreement by the Japanese car
companies to restrict their European sales. However, the EU removed such
barriers in the mid-1990s and Toyota responded by a major drive into the
region. Much of Toyota’s world growth has come from this European
expansion. According to one commentator, “The main reason for the success
is the decision by Toyota to be a major player in Europe.” Before that, Toyota
focused on America and gave second priority to Europe.
In earlier years, Toyota based its European strategy on selling cars that were
reliable but were not perhaps the most attractively designed – arguably even dull.
However, European car manufacturers like Volks-wagen were rapidly able to
replicate any competitive advantage based on quality. More recently, Toyota has
begun to design cars specifically for EU markets: In Europe, styling and
performance is generally high. European people enjoy driving their cars more than,
for example, Americans. In 1999, Toyota introduced the Yaris. That is a vehicle
designed specifically for Europe. Until then, although Toyota tried to develop a
vehicle that would suit Europe, the main target was not Europe.
But all is not completely satisfactory with Toyota Europe’s strategy. Its
factories are still not as efficient as Nissan. Its customers do not recognise
Toyota quality as being the highest, reserving that accolade for Volkswagen.
Moreover, profit margins on its European operations are small – but it built a
new plant jointly with PSA Citroen in the Czech Republic, where labour costs
are lower, to make the Yaris.
Toyota has enjoyed substantial growth in both sales and profits over the period
1999-2003. Its market share, its assets and its worldwide influence have impacted
on other companies and, at the same time, delivered real growth. Apart from some
production co-operation with competitors – it shared a manufacturing plant with
GM in North America and built a manufacturing plant with PSA Peugeot Citroen in
the Czech Republic – Toyota never
Contd...
268 -
co-operated or acquired another company outside its home market. This strategy Note
was s
quite different from that of Ford.
Importantly, Toyota always had some doubts about a simple global strategy. It used
basic
model designs for its volume car ranges but essentially produced cars that were
designed
for major regions of the world. For example, the Yaris small car was designed purely
for
the requirements of the European market in 2002 and there were no plans to
develop the
model as a global car.
GM’s Strategy
General Motors has often followed a strategy of building alliances, minority
shareholdings
and joint ventures outside its traditional North American and European markets. Over
recent years, it has also followed a policy of reducing its prices in order to hold its
market
share, especially in its home country.
GM’s Alliance Strategy

GM’s home country is the US where it has some of the strongest established brand
names
like Buick, Cadillac, Chevrolet and Pontiac. Its North American operations include
around
100 manufacturing, assembly and warehousing facilities.
It has also been involved for many years in Europe, where its brands include Opel
(Germany), Vauxhall (UK) and Saab. It has 10 production and assembly facilities in
seven
European countries.
In addition to investment activity in its existing plants, GM has taken minority

shareholdings in a number of world vehicle companies – for example, it owns 20
percent
of the shares of Fuji Heavy Industries, the owner of the Japanese brand Subaru; it has
10
percent of the shares of Fiat, Italy. The only company bought outright by GM was the
Swedish company Saab. GM spent around US$4.7 billions to build such minority
stakes
over the period 2001-2004.
Essentially, GM has built a series of alliances and minority shareholdings and then
co-
operated with such companies in order to gain purchasing savings from extra scale.
Thus,
it has obtained benefits in diesel engines from its links with Isuzu and Fiat; it has sold
Chevrolets in Japan through its co-operation with Suzuki; it has sold a Suzuki-
designed
car as one of its own brands in European markets. Essentially, such a strategy
derives from
serious doubts about the benefits of mergers and acquisitions in the car industry –
both
Ford below and DaimlerChrysler are examples of companies that have struggled with
outright acquisitions.
One drawback of such GM-type links is that the biggest benefits often go to their
smaller
partners, who benefit from access to GM’s size and negotiating power without
making
much difference to the overall GM purchasing power base. For example, Suzuki has
put
only 5 percent of its purchasing bill through GM’s worldwide purchasing network,
which
is insignificant for GM. Suzuki has then been able to benchmark the GM prices and
see if
its own supply network – mainly in Japan, where GM is weak – can offer a better deal.
In addition, some links are not easy to manage. An investment banker commented:
The
good part is that GM has not spent much, and it doesn’t have the Daimler Chrysler
problem
of integration (of the Daimler and Chrysler companies) Managing all these alliances
is
exceedingly complex, and the synergies it can extract, while significant, are limited.
Contd...
269
Notes GM’s Market Share Strategy – Reduce Prices

In 2004, GM spent US$6.5 billions on developing new car and truck designs
with the aim of changing its reputation for poor quality and indifferent design.
It sold its vehicles at an average price in the US of $18,891 – exactly $1 less
than the price in 2003. In other words, GM was investing more in R&D at the
same time as reducing its prices. It was offering cash buyers rebates up to
US$1,400 per vehicle. The company actually sold 50,000 fewer vehicles in
2004 than in 2003. In other words, GM was following a strategy of holding its
market share by selling at lower prices.
GM’s Problem of ‘Legacy Costs’
At the same time, GM – along with Ford – faced another major problem that did not
apply to Toyota. It was paying contributions to its employee health insurance and
pension scheme that amounted to US$6 billions per year and these were growing
at an additional US$500 millions per year. Two-thirds of the payments were not
even to present employees but to GM’s former employees who outnumbered
current staff by two-and-a-half to one. These were the so-called ‘legacy costs’
associated with the American method of paying its employees, including those who
had retired or otherwise left the business. No chief executive would wish to deny
former employees their rights. But GM was in danger of putting its current
employees and its shareholders at risk by such a strategy.
Ford Strategy
Global Strategy
For many years, Ford has been both a leading company in North America and in
Europe. Its strategy during much of the 1990s was to gain the benefits of a global
strategy. It made substantial attempts to integrate its operations on a global scale
in the period 1995-98. Core engineering and production operations were simplified
and combined with common parts, common vehicle platforms and common
sourcing from outside suppliers. The purpose was to achieve annual cost savings of
around US$42 billions through economies of scale and through the spread of the
development costs of a specific model across the sales in more countries.
Substantial savings were achieved and Ford’s profits then rose.
Acquisitions Strategy
Following this success, the company then embarked on what it called a ‘global
niche’ strategy. The company judged that world market demand was moving
towards niche car markets – like off-road vehicles, people carriers – and this
meant that the company should invest in these areas. The company therefore
invested heavily by acquiring companies in its specialist brands in these areas
– Jaguar cars, Lincoln luxury cars, Volvo cars, Land-Rover vehicles, Aston
Martin sports cars. The strategy of acquiring rival companies in some cases
carries the major risk that it becomes difficult to gain sufficient economic
benefits from the acquisition premium paid to buy such companies.
An additional danger with the acquisition strategy was that the company was
distracted by the need to integrate its acquisitions. Ford failed to invest
sufficiently in its basic car ranges – like the Mondeo and the Fiesta in Europe –
during the period 1999-2001. This allowed other companies to move ahead in
these areas. The outcome was a profit disaster in 2001.
Back to Basics Strategy
With the benefit of hindsight, Ford’s global niche acquisition strategy was
considered to be wrong and the Ford chief executive of that period, Jac Nasser,
was sacked. A new
Contd...
270 -
strategy of ‘Back to Basics’ was introduced under the guidance of one of the Note
members of s
the Ford founding family, Bill Ford. Ford was attempting to introduce basic new
models,
improve quality and reduce costs across its main passenger car ranges. The
company was
also part-way through introducing ‘flexible manufacturing’ systems. This meant
that the
company was able to allow different models to be made simultaneously on the
same
assembly line without the need for expensive tooling and robot changes. In
addition, Ford
was also developing a series of production designs that would allow a variety of
models
to be made using one basic vehicle template, thus saving across a range of
models. However,
GM, Chrysler, Toyota were also introducing such systems – indeed, Toyota has
had much
of this in place for some years.
Importantly, Ford had switched its efforts to redesigning its mid-sized cars to
improve
quality and equip them with many of the features found on more luxury models –
higher
driving positions, more storage space, etc. “Redefining the North American
saloon is a
tall order, but that is what we set out to do,” says Phil Marten – Ford’s group vice-
president of product creation. The Ford company relaunched some of its
American models
in early 2004 with such a strategy and had plans to follow this up with more
products in
later years. It was undertaking a similar range of activities across its European
models
over a similar time-period. More launches would follow in subsequent years as it
attempted
to regain its former position.
The company also had similar ‘legacy cost’ problems like its American rival,
General
Motors. Ford was also deeply engaged in a price-cutting strategy in its main
North
American markets in order to protect market share. Both Ford and GM faced a
major
competitive threat from rivals, including Toyota.
Thus, there is a strategic battle going on between the three market leaders. Both
GM and
Ford have been trying to catch up with Toyota for some years. Considerable data
is
available on the car market from the web, starting with the car companies
themselves. The
web data would allow you to analyse the immediate past strategies of each of
the three
companies. It would then be possible to assess their present levels of success.
Question
Evaluate the strategies of Ford, GM and Toyota.
14.6 Summary
Strategic evaluation generally operates at two levels – strategic and

operational level. At the strategic level, managers try to examine the
consistency of strategy with environment. At the operational level, the focus is
on finding how a given strategy is effectively pursued by the organisation.
Strategic control is a type of “steering control”. We have to track the strategy
as it is being implemented, detect any problems or changes in the predictions
made, and make necessary adjustments.
Operational control provides post-action evaluation and control over short periods.
They involve systematic evaluation of performance against predetermined objectives.
Organisations use many techniques or mechanisms for strategic control.
Some of the important mechanisms are management Information systems,
benchchmarking, balanced scorecard, key factor rating, responsibility centres,
network technique, Management by Objectives (MBO), Memorandum of
Understanding.
271
Notes If the need for evaluation was recognised from the outset, then a strategic
evaluation will
ideally take place before the project begins delivering activities.
The purpose of evaluating causal connections between activities, outputs and
outcomes, is to explore whether or not the project’s assumptions about the
likely outcomes and effects of its activities and outputs are well-founded.
There are three fundamental strategy evaluation activities, viz. reviewing
external and internal factors that are the bases for current strategies;
measuring performance and taking corrective actions.
14.7 Keywords
Balanced Scorecard: Strategic performance management tool - a semi-standard

structured report supported by proven design methods and automation tools.
Benchmarking: Comparative method where a firm finds the best practices in an
area and then attempts to bring its own performance in that area in line with the
best practice.
Management by Objectives: Process of agreeing upon objectives within an
organisation so that management and employees agree to the objectives and
understand what they are in the organisation.
Operational control: ensures that day-to-day actions are consistent with
established plans and objectives.
Responsibility centre: A segment of a business or other organisation, in which
costs can be segregated, with the head of that segment being held accountable for
expenses.
Strategic evaluation and control: Process of determining the effectiveness of a
given strategy in achieving the organisational objectives and taking corrective
actions wherever required.
Strategic surveillance: Broad-based vigilance activity in all daily operations both
inside and outside the organisation.
Fill in the blanks:

……………………control focuses on finding how a given strategy is effectively
pursued by the organisation.
………………………..control is concerned with tracking a strategy as it is being
implemented.
…………………….control is done through policies, rules, standard operating practices
and orders from superiors.
Assumptions or predictions around which a strategy is built is referred to
as…………………………
PERT and CPM are techniques of………………………control.
Control is based on a ……………………..from performance measurement to strategy
formulation.
The analysis of variance in performance is generally presented in a format called
……………………
272 -
8. Best practices serve as……………………..against which actual performance is evaluated. Notes

……………………………… are used to isolate a unit so that it can be evaluated
separately from the rest of the corporation.
Management by Objectives method was proposed by…………………….
Comment on the nature of strategic control and evaluation.

According to you, what should be the criteria for an effective evaluation system?
In evaluating a strategy, it is important to examine whether an organisation has the abilities,
competencies, skills and talents needed to carry out a given strategy. Why?
If you were a strategist making evaluation, what would you do if you find something wrong though
nothing is wrong with the performance?
Suggest some corrective actions that you would undertake if the performance is being affected
adversely by inadequate resource allocation and ineffective systems.
How would you check whether a strategy can be implemented within the resources of an enterprise?
“Strategic control is a type of steering control”. Discuss
Discuss the general approaches to strategic control.
Discuss the steps in implementing effective operational control system.
Analyse the role of organisational systems in evaluation.
1. Operational 2. Strategic
planning
3. Behaviour 4. premises
5. network 6. feedback loop
7. variance chart 8. benchmarks
9. Responsibility centres 10. Peter F Drucker

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STRATEGIC

Unit 1: Introduction to Strategic Management 1

Unit 1: Introduction to Strategic Note

Definition of Strategic Management

Nature of Strategic Management

Dimensions of Strategic Management

Need for Strategic Management

Benefits of Strategic Management

Risks involved in Strategic Management

Strategic Management Process

Strategic Management is exciting and challenging. It makes fundamental decisions

activities such as planning, organising, leading or controlling. Rather, it integrates

– Glueck and Jauch, 1984

– Fed R David, 1997

– Pearce and Robinson, 1988

– Johnson and Sholes, 2002

– Dess, Lumpkin & Taylor, 2005

l. Determination of long-term goals

2. Adoption of courses of action

3. Allocation of resources to achieve those goals

1.2 Nature of Strategic Management

Strategic Management can be defined as the art & science of formulating,

The characteristics of strategic management are as follows:

Example: Decisions to expand geographically would have significant

1.4 Need for Strategic Management

Source: Adapted from The Economist, July 17, 1999.

1.5 Benefits of Strategic Management

Notes 3. It provides a framework for improved coordination and control of activities.

1.6 Risks involved in Strategic Management

Strategic management is an intricate and complex process that takes an

0 Failing to involve key employees in all phases of planning

1.7 Strategic Management Process

Developing an organisational strategy involves four main elements – strategic

Defining What is our Organizational purpose is generally

Figure 1.1: A General Framework of Strategic Management Process

Agreement on and initiation of

The organization determines vision, F

The organization analyzes e

The organization implements the

The organization monitors c

Caselet Telecom Growth and Tata Strategic

Strategic or institutional management is the conduct of drafting, implementing

Environmental Analysis: Evaluation of the possible or probable effects of

1.10 Self Assessment Notes

Fill in the blanks:

1.11 Review Questions

0 Discuss the various elements of strategic management.

Suppose you are the Managing Director of an organisation. Your organisation is

Answers: Self Assessment

1. direction 2. reinterpreting, shifting

5. Formulation, implementation 6. vision, mission

7. image, competitive advantage 8. vision

9. sequentially 10. group think

11. planning 12. top management

13. external, internal 14. four

Aspects of Strategy Formulation

2 Characteristics of Vision Statements

5 Formulating a Vision Statement

After studying this unit, you will be able to:

Strategy formulation is the process of determining appropriate courses of action for

There are four primary steps in this phase:

2.1 Aspects of Strategy Formulation

Ȁ⸀ĀᜀĀᜀĀᜀĀᜀĀᜀĀᜀĀᜀĀᜀĀĀȀ⸀ĀᜀĀᜀĀᜀĀᜀĀᜀĀᜀĀᜀĀ1 Initiating actions to